The Corner

Why Aren’t Conservatives Unified on Financial Reform?*

Let’s revisit that Chait post on “conservative radio silence.” Chait writes:

You can see why the issue would pose problems for the right. First, it threatens the self-image they’ve developed over the last year as opponents of the government-business nexus.

Not the part about opposing the bill’s open-ended bailout authority. I know Chait thinks this is just a baseless talking point cooked up by Frank Luntz, but he’s wrong. AEI’s Peter Wallison was sounding that alarm well before Luntz issued his now-famous memo on financial reform, and besides: One can support resolution authority and still correctly point to other provisions that would allow federal policymakers to engineer bailouts. This is the case Sen. Bob Corker has been making. Liberals can’t seem to grasp the distinction, so they’ve branded Corker a flip-flopper — like it’s his fault they’re not paying attention.

Second, it’s difficult to work out a free market response. If you let Wall Street invest however it likes, it will eventually precipitate a financial crisis, with massive government intervention being the only option to save the economy. Or else you can break up the big banks, or limit their ability to take on systemic risk. Either way, government has to get involved at some step in the process. It almost seems like conservatives can’t choose which form of government intervention to accept, so many of them just aren’t choosing.

In any case, the lack of a coherent conservative analysis is probably one cause of the GOP’s retreat.

Chait has a point here: The typical theme of conservative analysis is that the government should be doing less, and though some conservatives are applying that theme to their analysis of financial regulation, most realize that the regulatory structure currently in place is flawed in such a way that simply shrinking its size would not fix it. So we are (gasp!) trying to come up with ways to work within the current framework to fix it. For instance, Kevin Williamson and I support a limited version of resolution authority because we think, in a post-Lehman world, investors will not take the prospect of bankruptcy seriously. They know that policymakers’ temptation to control the process will be too great. We do not entirely disagree with our conservative friends who are making the case for “enhanced bankruptcy.” We just think the moral-hazard problem has grown too big for bankruptcy to have credibility in the markets. Lesson one of the bailouts: Policymakers will always blink. It’s their reputations on the line, but it’s not their money they’re spending. Resolution authority, structured correctly, would at least put some rules into place and force federal officials to break up zombie firms rather than keep them on life support.

It’s also true, however, that there is no coherent liberal analysis of this issue. The only consistent themes I can identify are 1) people’s decisions should be heavily restricted to protect them from their own worst impulses, and 2) rich people should make less money. These are familiar themes, taken from other spheres of liberal analysis and applied to financial regulation. But they don’t explain liberals’ reflexive support for the Dodd bill. What school of progressive thought, for instance, explains progressives’ vigorous defense of resolution authority? They didn’t seem to care one way or another until Mitch McConnell started attacking it.

I think that explains why there appears to be more commentary coming from the Left on this issue: It lends itself well to left-wing demagoguery. Democrats have relentlessly portrayed Republicans and conservatives as puppets for moneyed interest groups and Machiavellian political operators. If people like Chait are just going to lazily smear us (or ignore what we’ve written) instead of engage us in a sincere debate, then what’s the point?

* You know, because we’re such a close-minded herd.

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