07 August 2012

To Big To Fail or Too Dumb To Know Why?

Senators David Vitter and (R-La) Scott Garrett (R-NJ) are credited here with introducing the "Terminating the Expansion of Too-Big-To-Fail Act." No acronym available, probably because it's a publicity stunt. Either that or these gents don't know any more about Title 2 of the 2010 Dodd-Frank Act than those who voted for it.

According to their press release, "Dodd-Frank took the problem that led to the Wall Street bailouts and made it the standard." Well, no.

The Wall Street bailouts (at least the ones I think Vitter and Garrett are talking about) were caused by bank failures. In turn, these bank failures were caused in part by lack of effective bank regulation and entirely no regulation of the non-banks that having been moving in on the banks' turf in the financial sector since the 1990s.

I suppose one driven entirely by ideology (see my thoughts on the problems of ideology in a different context here) might argue for a deregulation of the banking industry to match the unregulated non-banks. Of course, federal deposit insurance also would have to go. I wonder if Vitter and Garrett are proposing that? But more to the point, an unregulated banking industry would inevitably lead to irremediable bank failures and a financial crisis that would make the one of 2008 look like the shutdown of a corner grocery store.

A financial sector--including banks and non-banks--is as important to our economy as roads. Without it, we'd be eating dirt. Regulation of that sector, like regulation of public utilities and carriers, is not an option.

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