The Fire Next Time
By PAUL KRUGMAN
NY Times Op-Ed: April 15, 2010
On Tuesday, Mitch McConnell, the Senate minority leader, called for the
abolition of municipal fire departments.
Firefighters, he declared, "won't solve the problems that led to recent
fires. They will make them worse." The existence of fire departments, he
went on, "not only allows for taxpayer-funded bailouts of burning buildings;
it institutionalizes them." He concluded, "The way to solve this problem is
to let the people who make the mistakes that lead to fires pay for them. We
won't solve this problem until the biggest buildings are allowed to burn."
O.K., I fibbed a bit. Mr. McConnell said almost everything I attributed to
him, but he was talking about financial reform, not fire reform. In
particular, he was objecting not to the existence of fire departments, but
to legislation that would give the government the power to seize and
restructure failing financial institutions.
But it amounts to the same thing.
Now, Mr. McConnell surely isn't sincere; while pretending to oppose bank
bailouts, he's actually doing the bankers' bidding. But before I get to
that, let's talk about why he's wrong on substance.
In his speech, Mr. McConnell seemed to be saying that in the future, the
U.S. government should just let banks fail. We "must put an end to taxpayer
funded bailouts for Wall Street banks." What's wrong with that?
The answer is that letting banks fail - as opposed to seizing and
restructuring them - is a bad idea for the same reason that it's a bad idea
to stand aside while an urban office building burns. In both cases, the
damage has a tendency to spread. In 1930, U.S. officials stood aside as
banks failed; the result was the Great Depression. In 2008, they stood aside
as Lehman Brothers imploded; within days, credit markets had frozen and we
were staring into the economic abyss.
So it's crucial to avoid disorderly bank collapses, just as it's crucial to
avoid out-of-control urban fires.
Since the 1930s, we've had a standard procedure for dealing with failing
banks: the Federal Deposit Insurance Corporation has the right to seize a
bank that's on the brink, protecting its depositors while cleaning out the
stockholders. In the crisis of 2008, however, it became clear that this
procedure wasn't up to dealing with complex modern financial institutions
like Lehman or Citigroup.
So proposed reform legislation gives regulators "resolution authority,"
which basically means giving them the ability to deal with the likes of
Lehman in much the same way that the F.D.I.C. deals with conventional banks.
Who could object to that?
Well, Mr. McConnell is trying. His talking points come straight out of a
memo Frank Luntz, the Republican political consultant, circulated in January
on how to oppose financial reform. "Frankly," wrote Mr. Luntz, "the single
best way to kill any legislation is to link it to the Big Bank Bailout." And
Mr. McConnell is following those stage directions.
It's a truly shameless performance: Mr. McConnell is pretending to stand up
for taxpayers against Wall Street while in fact doing just the opposite. In
recent weeks, he and other Republican leaders have held meetings with Wall
Street executives and lobbyists, in which the G.O.P. and the financial
industry have sought to coordinate their political strategy.
And let me assure you, Wall Street isn't lobbying to prevent future bank
bailouts. If anything, it's trying to ensure that there will be more
bailouts. By depriving regulators of the tools they need to seize failing
financial firms, financial lobbyists increase the chances that when the next
crisis strikes, taxpayers will end up paying a ransom to stockholders and
executives as the price of avoiding collapse.
Even more important, however, the financial industry wants to avoid serious
regulation; it wants to be left free to engage in the same behavior that
created this crisis. It's worth remembering that between the 1930s and the
1980s, there weren't any really big financial bailouts, because strong
regulation kept most banks out of trouble. It was only with Reagan-era
deregulation that big bank disasters re-emerged. In fact, relative to the
size of the economy, the taxpayer costs of the savings and loan disaster,
which unfolded in the Reagan years, were much higher than anything likely to
happen under President Obama.
To understand what's really at stake right now, watch the looming fight over
derivatives, the complex financial instruments Warren Buffett famously
described as "financial weapons of mass destruction." The Obama
administration wants tighter regulation of derivatives, while Republicans
are opposed. And that tells you everything you need to know.
So don't be fooled. When Mitch McConnell denounces big bank bailouts, what
he's really trying to do is give the bankers everything they want.
***
Collateral Murder
WikiLeaks has released a classified US military video depicting the
indiscriminate slaying of over a dozen people in the Iraqi suburb of New
Baghdad -- including two Reuters news staff. Reuters has been trying to
obtain the video through the Freedom of Information Act, without success
since the time of the attack. The video, shot from an Apache helicopter
gun-site, clearly shows the unprovoked slaying of a wounded Reuters employee
and his rescuers. Two young children involved in the rescue were also
seriously wounded. For further information please visit the special project
website www.collateralmurder.com.
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