When lawmakers return from their Spring recess on April 12, I hope they will seriously begin to address the breakup of "too big to fail" firms.
The issue is indeed so important that I’ve written a a column in the Atlanta Journal Constitution.
To strengthen American economic stability, Members of Congress should be fully devoted towards solving the systemic risk issue – and Congressional proposals to place authority into a new "systemic risk regulator," an agency run by the FDIC to address failing institutions, is misguided: As I wrote:
..Meanwhile, the suggestion by Republican Sen. Bob Corker of Tennessee to create an FDIC-like resolution agency for failed banks amounts to an insurance policy for too big to fail.
It would tax all banks, even those that don’t pose a systemic risk, and hence their small investors, retirees and ultimately taxpayers. And for what? The [$50 billion] the proposal would set aside wouldn’t cover a 30th of the assets of one of the largest institutions.
Too-big-to-fail also is just too expensive to insure...
Markets have the ability to self-correct, and a renewed dialogue articulated by MIT Sloan Professor Simon Johnson needs to be introduced to let firms fail. Tangible reforms must be put in place which reduce the chances of another taxpayer-funded bailout. Examples include imposing leverage limits and creating incentives to get off the too big to fail list. Senator Chris Dodd’s legislation does exactly the opposite – the provision for the systemic risk regulator thereby immediately recognizes and accepts the existence of too big to fail. By institutionalizing these entities, it is endorsing the "all gain, no pain" mantra in which banks take extra risk because of their implied guarantee.
America’s bankruptcy code already addresses failed companies in an effective process. New regulatory bodies as proposed by Senators Dodd and Corker are not needed. And moreover, taxing all financial institutions according to size for a new $50 billion "bailout fund" is arbitrary and will inhibit innovation and capital creation on the part of banks. No longer should we perpetuate a system that has only intensified today’s economic crisis.