More than a year after the Federal Reserve and the Treasury Department stepped in to prevent the bankruptcy of Bear Stearns, there’s still no official policy to solving the too big to fail problem. Even worse, there don’t seem to be very many serious proposals to restoring market processes, reducing moral hazard The Obama administration rolled out another description last week: “Tier 1 Financial Holding Companies.” and ending the implied taxpayer guarantee of large, complex, systemically important financial firms.
Barack Obama and Tim Geithner’s regulatory overhaul last week falls short of doing anything serious. So far short, actually, that it’s probably fair to say it falls short of doing anything at all about the problem.
Our read of Eric Dash’s sobering column in the Week in Review section of the New York Times actually seems to indicate that the administration is moving in the wrong direction.
- Some damn Treasury Department flack says: “You have to be flexible…You have to be clear that there is not a presumption of too big to fail. But you can’t give it up entirely because to do so may not allow you to avoid, in extremis, a major meltdown.”
- Larry Summers says “I don’t think you can completely turn back the clock.”
- The Obama administration rolled out another way of talking about Too Big To Fail last week: “Tier 1 Financial Holding Companies.” Giving these things their very own official name is a way of saying we’re stuck with them.
There seem to be two problems that are stopping policy makers and wonks from understanding what to do.
- A faith in technocratic solutions. The Obama adminsitration has an real faith that well-intentioned regulators empowered with strong policy tools can effectively prevent the ruin of large financial firms. That is, they believe they can make “Too Regulated To Fail” a reality. The idea that there might be real limits to bureaucratic effectiveness seems not to play a serious role in their plans.
- Conceiving of the problem as “too big.” While it may be true that it is more difficult to resolve the failure of giant financial institutions, the problem is not primary one of size. Indeed, the size of some of our financial institutions may be a symptom of the bailout assumption rather than the cause of bailouts. If the market didn’t believe the firms would be bailed out, it might exercise a check on the size of a firm.