The Agenda

Jon Huntsman’s Financial Reform Agenda

In the Wall Street Journal, former Utah governor Jon Huntsman calls for fixing the “too-big-to-fail” problem:


More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.

The major banks’ too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop. This funding subsidy amounts to roughly 50 basis points, or one-half of a percentage point in today’s market. …


There is more than one fix. The best would be to eliminate Dodd-Frank’s backstop. Congress should explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy. It could impose a fee on banks whose size exceeds a certain percentage of the GDP to cover the cost they would impose on taxpayers in a bailout, thus eliminating the implicit subsidy of their too-big-to-fail status. Congress could also implement tax reform that eliminates the deduction for interest payments that gives a preference to debt over equity, thus ending subsidies for excess leverage.

Eliminating subsidies would encourage the affected institutions to downsize by selling off certain operations or face having to pay the real costs of bailouts. We need banks that are small and simple enough to fail, not financial public utilities.

Huntsman is a no-hoper, but he is wise to pivot from simply attacking efforts to regulate the financial system to trying to find reforms that will make the system more stable and conducive to economy-wide growth.