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Huntsman is right on big banks

Jon Huntsman doesn’t have a snowball’s chance of winning the GOP nomination, and that’s too bad. He’s the most socially liberal of all the Republican candidates, but I would vote for him because he’s the only one talking sense about the financial sector and desperately needed reforms. Here’s Huntsman writing in the WSJ: Is Dodd-Frank […]

Jon Huntsman doesn’t have a snowball’s chance of winning the GOP nomination, and that’s too bad. He’s the most socially liberal of all the Republican candidates, but I would vote for him because he’s the only one talking sense about the financial sector and desperately needed reforms. Here’s Huntsman writing in the WSJ:

Is Dodd-Frank an appropriate regulatory response to the 2007 financial crisis? Tragically, no. That legislation ignores the government’s pervasive role in causing the crisis, assures future transfers from taxpayers to bankers by institutionalizing a government backstop for “too big to fail” firms, and imposes massive new regulations and unreasonable compliance costs on smaller banks. As a result, lending to small businesses from small banks suffers.

The government helped bring on the recession by distorting the housing market through Fannie Mae and Freddie Mac, touching off financial bubbles driven by excessive credit creation by the Federal Reserve, granting a privileged position to toothless rating agencies, and allowing the capture of regulatory agencies by the biggest Wall Street players. The largest banks were pushing hard to take more risk at taxpayers’ expense.

Today we can already see the outlines of the next financial crisis and bailouts. … 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.

 

Economist Simon Johnson comments:

In particular, Mitt Romney is very vulnerable on this issue, as he has already lined up so much support from among the biggest banks. Presumably the prospect of Wall Street donations is enough to deter some Republicans (and many Democrats) from confronting the issue of “too big to fail.” But if Mr. Romney is already far ahead is this fund-raising category, there is much less to lose. And his donations must make it harder for him to explain exactly how he would ensure that even one megabank could fail.

It’s not enough just to wish that big banks could fail or to promise not to support them next time. This is not a credible commitment — and the “resolution authority” created under the Dodd-Frank regulatory legislation is a paper tiger with regard to winding down the biggest banks. If the choice is global economic calamity or unsavory bailout, which would you — let alone any Republican president — choose?

That’s an important point. You can’t say, “OK, banks, you’re on your own next time.” If the TBTF banks do fail, they could take us all down with them. The government has to compel them, through legislation, to break themselves up and recapitalize, so that if they do fail, the system can survive. This is where the Tea Partiers are wrong to be so ideologically opposed to government regulation. We need the government’s hand to keep these private institutions from becoming too powerful. Let the banks do whatever they want, and we are all threatened. Why this is so difficult for so many conservatives to understand is beyond me. Their anti-government hostility goes beyond common sense. They can so plainly see how Big Government can be a threat to liberty — and they’re right about that — but they don’t see how Big Business can pose a different but equal threat to liberty.

Anyway, good for Huntsman. It’s depressing that Herman Cain and Rick Perry are the only real challengers to Romney.

UPDATE: But as Daniel Larison points out, he’s bad on foreign policy.  No worse than the rest of them, though, Ron Paul honorably excepted. That’s cold comfort.

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