November 5, 2010

The Bigger They Come...

(cross-post from TheConglomerate forum: Legislative Agenda for the 112th Congress)

Agenda for the 112th: The Bigger They Come

Too Big to Fail.

Bailouts of megabanks preserved our financial system-for better and for worse. Next time around, Dodd-Frank allows winding down of big firms that cause systemic threats.  But as I far as I can tell, the Act doesn’t require any liquidations—it’s up to the Treasury Secretary to decide whether to appoint the FDIC as receiver, (and up to the FDIC to pass the actual rules ).  So it’s not clear whether there will be political courage to use this power in a future crisis; likely there will be bailouts again. 

The obvious solution to the too-big-to-fail problem is to start breaking up the too-big ones that almost failed last time, and to prevent any more from getting that big.  Then we can see a little creative destruction now and again.  [How to do it?  Luckily, I don’t have to bother with that part, since this forum is about the next two years and this is so not going to happen any time soon (if ever).]

Monetary policy: [Yes, I know this is mostly Fed policy, not legislative]

 One has to wonder: the economy almost self-destructed because of easy credit, and the solution is…to ease up on credit? 

I understand, and generally sympathize with, demand-side economics, and it may be the only way to mitigate the current pain of job losses.  And I find it hard to believe there’s currently a real danger of inflation in the near term (those who claim to be worried about these days are probably most concerned about bond prices).  But in the longer term, economic growth based entirely on expanding domestic demand seems like a snake eating its own tail.  Is it prudish--or radical--to suggest there’s something wrong with our culture of consumption?   If it needs fixing, punishing savings with low/negative interest rates ain’t the way to start.  I don’t profess to have a palatable alternative.  Maybe that’s the point—it’s time to take the nasty medicine….But I have tenure, so it’s too easy for me to say that. 

 Do nothing:

Looks like I'm not the only wishing I'd written Dave Hoffman’s post, but since he got there first, let me polish the apple a bit: Instead of passing new laws, how about actually enforcing the laws already on the books?    Oh, yeah, enforcement is the job of the executive branch.  Then how about Congress just refrains from obstructing the enforcement of the ones it just passed?  [Edit: Underbelly has more juicy stuff on this.] Just a thought.