The Corner

Why Are Liberals Backing Bailouts?

Our editorial today lays out four main objections to the Dodd bill as written:

1. The resolution authority is poorly designed: “As structured, this authority would allow the government to bail out non-bank creditors, and worse, to play favorites among them.”

2. The bill entrenches and enlarges the government’s power to engage in back-door bailouts via loans and loan guarantees.

3. The new Consumer Financial Protection Bureau “could impose job-killing business regulations and jeopardize financial stability.”

4. The bill’s corporate-governance provisions would give organized labor too much power over management decisions.

As I understand it, having spoken with several participants from the GOP side of the ongoing negotiations, numbers one and two are the only ones the Democrats really have to fix in order to peel off eight to ten Republicans and get a bipartisan vote for this bill. Numbers three and four are bad — really bad — but on this issue I just don’t see moderate Republicans making them their hill to die on.

What’s more, one and two are easily fixable. With regard to one, the editors point out:

The good news is that it shouldn’t be too hard to fix these problems. The language needs to be scrubbed so that the FDIC has zero authority to provide creditors with better treatment than bankruptcy affords them. The resolution fund should be used only to pay obligations that are incurred after insolvency. In some cases, that money may be used to fund advance claims from creditors — claims that must be repaid if a creditor has been advanced more than it is entitled to under the law. The bank and non-bank sides of the FDIC should be walled off from each other to prevent conflicts of interest. And, if the FDIC has to borrow from the Treasury to finance any part of a resolution, taxpayers should be first in line to get paid back.

And two could be fixed via some kind of fast-track congressional approval process: “If the power to offer such extraordinary assistance is truly necessary in the event of a liquidity crisis, regulators should have little trouble convincing Congress to give it to them… But Congress should not pre-emptively hand the keys to the fisc to a group of unelected officials who, though well meaning, have precious little incentive to look out for the taxpayers’ best interest when they believe the sky to be falling,” the editors write.

I can see why Sheila Bair and Tim Geithner would want as much flexibility as possible to do bailouts. And I can see why Chris Dodd would acquiesce to their wishes — he needs allies in this fight, plus he’s about to be out of a job. He’ll probably wind up working for either Wall Street or the administration, and the resolution authority as currently structured benefits both.

But I can’t see why liberal policy analysts and pundits would support this provision (which, by opposing any more negotiations with Republicans, is what they are doing), although three possible reasons spring to mind:

1. They don’t understand the way resolution authority would work and/or they haven’t read the bill, so when they say, “This bill wouldn’t do bailouts,” they don’t really know what they’re talking about.

2. They don’t think Democrats should compromise with Republicans on anything, because they think Democrats have the upper hand politically on this issue and can make big political gains by forcing the GOP to filibuster this bill.

3. They really do support giving the administration an open-ended bailout authority, maybe because they understand that if government is forever responsible for saving the financial sector, it has a better case for imposing strict regulations on the financial sector, and they view that as a good thing.

I think some combination of all of the above is likely, but I’d be happy to entertain other theories/explanations.

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