Over the past few months, the American people have made very clear their views on bailouts: They don’t like them.
But, against a backdrop of tea parties and protests against reckless government spending, Democrats are unveiling legislation that would entrench in law forever the policy of “too big to fail” and taxpayer-funded bailouts.
Almost everyone agrees we need legislation to reform the financial industry. Congress needs to take steps to prevent the kind of financial crisis that occurred from happening again and make sure that taxpayers are not on the hook in the future. Senate Democrats, however, have gone beyond and produced a partisan bill that would perpetuate current bad policies. It’s as if the Democrats looked to the example of Fannie Mae and Freddie Mac, said that’s a good idea, and decided to extend that model to more of the economy. And we all know
what happened with Fannie and Freddie, the result of which is $6.3 trillion liability for taxpayers.
The Democrats’ financial reform bill would create a $50 billion so-called “slush fund” established through assessments on the largest banks. By creating this fund, Congress is, in effect, designating those entities as “too big to fail,” meaning the government will have to then pick up obligations beyond what is covered by the $50 billion. In fact, the bill specifically says the Federal Deposit Insurance Corporation (FDIC) “will guarantee the obligations of banks” in times of severe economic distress. That’s the status quo.
The bill even extends the scope of these potential future bailouts beyond banks. It would explicitly give the Federal Reserve authority to regulate any large financial company in the United States. A new government board based in Washington would decide which institutions get special treatment, giving unaccountable bureaucrats tremendous authority to pick winners and losers. Favored firms would have an advantage over their competitors.
The legislation would even extend the reach of the government to smaller companies. If a business makes a loan that takes more than four payments to repay, this bill would cover it. A car dealer that finances the automobiles it sells would be covered if it takes a consumer more than four payments to pay for his or her new car. So too would a dentist’s office or an optometrist if a patient takes more than four payments to pay for his treatment. Under the guise of protecting the consumers, this new agency would actually have the opposite effect by limiting the availability of credit to families and businesses.
There are problems in the banking industry, but the kind of reform that is being suggested is not an improvement; it is a continuation of the same obligation of taxpayers to bail out those entities deemed too big to fail. A better solution for failing firms is a specialized bankruptcy without government guarantees — exactly what could and should have been done with General Motors and Chrysler.
Republicans want to work with Democrats to produce a bipartisan bill that can pass the Senate by a wide margin. Let’s not have any more health care bills that are passed strictly on a partisan, party-line basis, with a consensus of Americans opposed. We can provide for the orderly bankruptcy of failed institutions without making taxpayers foot the bill.