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The Spectacle Blog
Jon Huntsman got a chance to elaborate on his anti-big bank message during the CNBC debate:
With respect to the banks that are too big to fail, you know today we’ve got, as I mentioned earlier, six institutions that are equal to 60, 65 percent of our GDP, $9.4 trillion. They have an implied guarantee by the taxpayers that they will be protected. That’s not fair, that’s not right for the taxpayers.
HARWOOD: So you break them up?
HUNTSMAN: I say we need to right-size them. I say, in the 1990s, you had Goldman Sachs, for example. That was $200 billion in size. By 2008, it had grown to $1.1 trillion in size. Was that good for the people of this country, or —
HARWOOD: Well, how would you accomplish that? How would you right-size that?
(CROSSTALK)
HUNTSMAN: I think we ought to set up some sort of fund. I think we ought to charge some sort of fee from the banks that mitigates the risk that otherwise the taxpayers are carrying. There has got to be something that takes the risk from the taxpayers off the table so that these institutions don’t go forward with this implied assumption that we’re going to bail them out at the end of the day. That’s not right, and it’s not fair for the taxpayers of this country.
Huntsman has drawn some favorable attention for his populist proposals on the problem of too big to fail banks. He wants to implement a size tax on banks, in order to disincentize banks from growing beyond a certain point and to recompense taxpayers for, unwillingly, assuming the risk of bailing them out. Such a tax, though, would only work against the incentives created by the Dodd-Frank financial regulation bill, which actually subsidizes banks that are too big to fail.
Dodd-Frank mandates that regulators label any bank with over $50 billion in assets as “systemically important financial institutions” and regulate it more tightly. In other words, those banks are acknowledged by the government as too big to fail. The bill is also supposed to include mechanisms to ensure that such companies don’t receive bailouts, but those measures are based on regulators’ discretion and thus will probably fail when push comes to shove. The result is systemically imprtant financial institutions enjoy an implicit subsidy: the market will perceive them as backed by the government even if the feds don’t say as much, meaning they will be able to raise debt and capital more cheaply than smaller banks will. In other words, the banks have the same advantages that Fannie Mae and Freddie Mac did before the financial crisis.
So if Huntsman wants to penalize banks that are too big to fail, the first step is getting rid of the implicit subsidy provided to them by the government through Dodd-Frank.
Huntsman has acknowledged the problem posed by Dodd-Frank in other venues. Ideas for solving the problem of too big to fail are well and good, but they are merely academic without addressing the distortions created by Dodd-Frank. Hopefully the Republican candidates will get as much time to talk about Dodd-Frank in future debates as they do, for instance, Obamacare.
View all comments (7) | Leave a comment
More Blog Posts by Joseph Lawler
http://spectator.org/blog/2011/11/11/too-big-too-fail-cant-be-fixed
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PattyMor| 11.11.11 @ 5:50PM
How about reinstituting depression era reforms that were rescinded. The first step would be to separate trading from banking by mandating spin offs. Then get rid of the community reinvestment act and Fannie and Freddie, and all the housing promoting agencies. A free market does need "help".
The current system is just fancy footwork for croney capitalism.
PCC| 11.12.11 @ 1:27AM
The source of complaints about the size of banks is the same source of complaints from the unions and the Occupy Wall Street protesters, but most American politicians, as well as most Americans, are too ignorant to realize it.
It's a global economy, Stupid.
These banks are competing globally, not just in the U.S., and they need geographical reach and a large asset base to serve their customers and shareholders.
If you want to shrink them down to the size of banks in Australia or Austria, then get ready for an economy and job market of the same size.
Man up, America.
RJ| 11.12.11 @ 1:36AM
I am much more interested in right-sizing government. The focus should be on eliminating, not just cutting.
PCC| 11.12.11 @ 4:48AM
The rest of the world is competing for investment, trade, jobs, etc. in pursuit of their God-given right to improve their standard of living.
Hardly any of that competition is "unfair", despite the whining from Washington. Most of that competition is people working harder, and governments setting policies smarter, than the U.S.
The first, and most important, step is for the U.S. to recognize it's in a global competition against people and countries who are playing for keeps. The American worker, and American business, can compete successfully against all comers if they put their minds to it.
U.S. government policy should be geared towards lower corporate tax rates, at a maximum of 25% but ideally 15% or lower, to attract domestic and foreign investment in all industry sectors, but especially manufacturing.
Also, all temporary tax measures should be abandoned, whether it's payroll tax, income tax, estate tax or any other tax. In this regard, above else, business seeks certainty. Of course, tax policy is a moveable beast and can always be changed by future legislation, but to build uncertainty into the policy is the height of foolishness, not to mention cynicism.
Chris k| 11.12.11 @ 7:55AM
Perfect example why Huntsman is not even being considered. He is against economic growth. If we limit the size of banks, we limit investment, and therefore, limit job growth. Banks lend money to small businesses to create jobs. It's like huntsman and Oromney are trying out-liberal each other
Dai Alanye | 11.12.11 @ 10:24AM
Come on now - huge banks don't lend to small businesses. You won't go to Goldman to finance your hamburger stand. The only need for big banks is to finance huge projects, and even those usuually require a consortium.
I'm not favorable toward Huntsman, but after some flailing around he seems to be edging toward a reasonable position - require separation of banking functions. The fact is we were better off, for instance, when mortgage loans were made primarily by Savings and Loan banks, way back before Bob Dole killed them off with his '86 tax reform. As far as separating other functions from large banks, I'm agnostic for the present but willing to be convinced.
JimH| 11.12.11 @ 1:16PM
One thing not fully appreciated is that the TBTF banks get that way in part because only they can thrive in an environment were economies of scale come into play when satisfying all of government regulations. This is also why you don't usually hear too many complaints about these rules from the larger institutions.