Does Bill Daley appointment further enshrine Too Big To Fail?

January 11, 2011

Cato’s Mark Calabria thinks the problem is not people but policy:

MIT Professor Simon Johnson recently argued that Bill Daley’s appointment as Obama’s Chief of Staff signals that “too big to fail”, as it relates to our largest financial institutions, is here to stay. Personally I never thought it was in doubt. With Geithner at Treasury and Dodd-Frank further codifiying “too big to fail”, its been clear for sometime that the bailout net is larger than its ever been, and is not being pulled back.

That said, Professor Johnson’s focus on Daley distracts from the real issue, which is changing our bank regulatory structure to end bailouts. The focus on Daley has the potential to lead us down that path of “if we just had the right people in government.” We shouldn’t be designing our regulatory structures with the “right” people in mind, but rather with the rule of law in mind. In fact one of the benefits of the Obama Administration is that it serves as a great test of the “right people” hypothesis of government. One is unlikely to see a more left-leaning White House than this one, so if this one gets captured by special interests, including Wall Street, than its a safe bet that any future Administration will as well.

Since I believe most of us actually want to end “too big to fail”, the real question is over how. It strikes me that we have three options: regulate the largest institutions to death (or competitive disadvantage), break them up, or credibly impose losses on their creditors. Ultimately I think the regulation approach is bound to fail, if for no other reason than regulatory capture. (Even Elizabeth Warren seems to get this: “Regulations, over time, fail. I want to see Congress focus more on a credible system for liquidating the banks that are considered too big to fail.”) The breaking them up might sound attractive in theory, but I have a hard time seeing how it truly works in practice. After all few in Washington viewed Bear Stearns as “too big to fail”. Accordingly I believe the best approach would be to force creditors to take losses, or be converted into equity. To make this credible, we must bind the hands of the regulators. As long as the Fed. Treasury or the FDIC can inject money, then bailouts are always on the table.

Sadly what the Daley appointment reminds us is that any attempt to end “too big to fail” will likely have to wait until the next Administration. Not only is this one wed to bailouts, the President would likely veto any bill that really tied the hands of the Fed.


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“if we just had the right people in government.”, more to the point, how do we get the “right” people, when Corporations(Banks) can donate funds for election campaign, when the “FED” is comprised of Banks, when the Treasury is the lapdog of the FED? The financial advisor is tied to the Banks…….. the list goes on.

U.S. citizens need to take charge of their knowledge of how things are currently worked as a whole in todays Political arena. Then and only then will they be able to hold responsible the Politicians on a event by event, Bill after Bill basis rather than after the results happen.

Americans are unhappy.. but do not know what to do. Neither do the Politicians, whom only guess, take advise, then make excuses. This comes from a lack of desire for personal oversight and the results are Politicians looking like uneducated bumblers lapping at the bowl of Bank inspired greed.

To make any real change, Corporations must be excluded from the Whitehouse(and Representatves). Corporations must be reined in via removing limitations on stock holders in respect to voting rights and certain States stance on those rights.

If the Corp.s feel, as it is waved about, are unable to compete, without running America through the ability to direct Policy and runnning companies must involve management getting rich at the expense of shareholders, the I say let them go elsewhere.

Let’em go to Russia, China, India, Malaysia… Stay there, enjoy… or we the people, will have to beg for another bowl of gruel.

The only good thing about watching the circus going over the cliff, is knowing it will soon be over… too bad we’re in the same bus.

Posted by Chivelry | Report as abusive

Thanks for the information. As almost any financial advisor can attest, there is nothing too big to fail. From the sinking of the Titanic to the myriad of economic fluctuations that have plagued society throughout history, it seems like any endeavor is subject to potential failure no matter how much people want it to succeed.

Posted by GramJ | Report as abusive