Discussion: (16 comments)
Comments are closed.
The public policy blog of the American Enterprise Institute
View related content: Pethokoukis
I’ve noted that on several occasions Paul Ryan has been critical of big banks and seemingly in support of the Volcker Rule. Ezra Klein highlights those instances and wonders if Ryan is in favor of breaking up the big banks.
A few thoughts of my own:
1. I have explicitly asked Mitt Romney, Ryan’s new boss, about this:
PETHOKOUKIS: Richard Fisher, head of the Dallas Fed, recently called for the breakup of large banks. Should we break up the big banks to ensure financial stability in the future and avoid another “too big to fail” problem?
ROMNEY: I’m not looking to break apart financial institutions. I think what caused the last collapse was a convergence, almost akin to a perfect storm, of many elements in our economy and regulatory structure. … And if we have in place modern regulation and regulators who are keeping their eye on the ball, there’s no reason to think we will go into another crisis of the kind we just endured as a result of the mortgage meltdown.
2. Up until recently, my sources tell me,Team Romney was completely unaware that there was a “break up the big banks” (BUBB) movement on the right. Certainly his political advisers are unenthusiastic.
3. Yet, this is still a bleeding-edge policy issue among conservatives that many see at odds with the idea of deregulation and less government intervention. Of course, the counter argument is that the reason banks are so big and interconnected is due to government incentives like Too Big To Fail.
4. But that being said, Ryan understands the danger of crony capitalism to the U.S. political economy, and the Wall Street-Washington nexus — not Solyndra — is the number one example of this. I would guess he has an open mind on the issue.
5. Some on the right who are concerned about TBTF offer a different solution than BUBB. Here is economist Bob Stein on the various options:
In theory, one way is Dodd-Frank, the route favored by the Obama Administration and congressional Democrats: Increase regulation, give regulators more discretion, and hope they do their jobs better than any set of regulators ever has. Essentially, this approach gives more power to the same kinds of people who missed the shenanigans of Bernie Madoff, MF Global, Stanford Financial, and Peregrine Financial. And that’s just in the past few years. Faith over experience.
Another route is to break up the big banks. As Alan Greenspan has said, “If they’re too big to fail, they’re too big.” The problem with this approach is that it eliminates the efficiencies provided by large banks and assumes there is no possible beneficial tradeoff for bank size above a certain level.
A third option would be gradually, but substantially, raising capital requirements for banks considered TBTF. Not the small increase already scheduled under Dodd-Frank. Instead, lift capital requirements to at least 25% over the next twenty years and apply it to all assets, including government debt. (Yes, that means you, Uncle Sam.)
Institutions that don’t want to hold more capital wouldn’t have to; they’d simply have to stay small enough to fail. And in the meantime, we could dispense with the Dodd-Frank rulebook that tries to substitute the judgment of government regulators for what these firms really need, which is more equity to back up risk-taking.
6. Recently, the much-respected Guggenheim Securities Washington Research Group compiled a list of possible candidates to be Treasury Secretary in a Romney Administration. I have highlighted one fascinating possibility:
· Former World Bank President and Deputy Secretary of State Robert Zoellick. Zoellick could also be a logical choice for Secretary of State. Few in Washington have the resume or the policy chops of Zoellick who currently resides as a senior fellow at Harvard’s Kennedy School.
· U.S. Senator Bob Corker (R-Tenn.). The former businessman and Chattanooga Mayor is a leading voice on the Senate Banking Committee.
· Hewlett Packard CEO and President Meg Whitman. The former President and CEO of eBay, Whitman lost a high-profile race for California Governor in 2010 and is a national finance chair for Romney.
· Former Senator Judd Gregg (R-N.H.). The former Granite State Governor and Senate Budget Chairman was a 2008 and 2012 backer of Romney. Gregg was an architect of TARP and whipping support for Bernanke’s re-confirmation vote. Gregg is currently an advisor to Goldman Sachs, which could produce an additional speed bump.
· U.S. Senator Rob Portman (R-Ohio). A VP finalist and former OMB Chief, Portman could fill a number of Cabinet roles.
· Former White House Chief of Staff Erskine Bowles. There will be at least one Democrat in the Cabinet, per tradition. Bowles is the Bowles of Simpson-Bowles and is definitely a wild card, but stranger things have happened.
· FDIC Director Thomas Hoenig. The darkest of the dark horses, the former Kansas City Federal Reserve President has a fan in Sen. Richard Shelby (R-Ala.) and is the author of the plan to break up the big banks (require commercial banks to divest their broker dealers).
Hoenig would be a stunning and blockbuster pick.
7. But if there were some secret plan to bust up the banks or dramatically raise capital levels, why not announce it now? Yes, it might superficially operate at cross currents with Romney’s small government message. But such a move would dramatically tell voters that Romney-Ryan would approach Wall Street in a much different way than the Obama administration.
Indeed, the story told by former TARP Inspector General Neil Barofsky in his great new book Bailout is one of the White House and Obama Treasury Department coddling banks and dishing out TARP funds with no strings attached. A really devastating portrait of regulatory and cognitive capture. A lot there for Romney-Ryan to capitalize on if they want.
Comments are closed.
1150 17th Street, N.W. Washington, D.C. 20036
© 2014 American Enterprise Institute for Public Policy Research