Still too big to fail?

James C. Sandefer

If you’re on board with the “too big to fail” scam run on the taxpayers, then you’ll go wild over the latest financial reform proposal making the rounds in Congress. It’s another brainchild of none other than Barney Frank, chairman of the House finance committee. As with many of his initiatives, this one also does virtually nothing to change the present arrangement of the financial system.

First of all, don’t worry; the “too big to fail” financial institutions won’t be diddled with. In all probability, they may grow even bigger and less accountable than they are today, which is hard to comprehend. The behemoth firms such as Goldman Sachs won’t notice any tighter oversight and will continue to gamble on loans using money guaranteed by the Federal Deposit Insurance Corporation (FDIC). The good news for the Feds is that the Federal Reserve Board will be given a more powerful role than what’s in place today. Gosh, that’ll all but guarantee that none of the same dim-witted decisions that got us into the current economic sinkhole are replicated.

Seriously, nobody in their right mind wants the Feds to fail because we, the taxpayers, are always on the hook for the bailout scheme. But the legislation being pushed by Mr. Frank will open the door a bit wider allowing additional government control to come through. If he gets his way, the new and improved Fed will be allowed to decide which financial firms are run through a bankruptcy-like resolution process. And guess who foots the bill for that cumbersome, lawyer-heavy process.

Mr. Frank says his bill proposes shifting the cost of a big bank failure cleanup to other big banks. Not exactly; the way things are laid out in his bill just the opposite would occur. While he talks about having a pool of money set aside in advance that is acquired from the big banks to cover the cost of a bailout, the fact is the bill proposes a form of assessment on big banks after a failure has taken place. There’s no provision for an “ahead of time” emergency fund anywhere in the bill.

Here’s something I don’t understand. If a big bank makes irresponsible decisions regarding loans that eventually lead to its failure, wouldn’t this imply a serious flaw in government regulation and oversight? Additionally, why would the Feds penalize other banks that are performing well and acting responsibly? It seems to me that when the government fails there should be a mechanism that actually penalizes those who blew it rather than constantly dinging the taxpayers. Shifting the burden onto healthy banks simple makes them more susceptible to future financial problems of their own.

As usual, the bottom line in Mr. Frank’s legislation is that it virtually guarantees that taxpayers will be on the hook for all future bailouts, and there will be more of them. Possibly an even greater flaw in this bill is that it doesn’t do a singly thing to fix the ongoing dilemma of having financial institutions that are too big to fail.

There’s a growing consensus among actual voters across the country for breaking up these banks that are too big to fail, and it includes some influential people in the Federal Reserve and FDIC. Those opposing this logical rationale are the ones holding the reins of power and steering the financial process (e.g., Barney Frank and company). He and his cohorts have responsibility for the regulatory and oversight malfunctions that failed to identify and divert the current disaster. There’s no indication that any of them have learned anything from their mistakes, so it’s time for someone else to assume control of the financial reform process. Mr. Frank may believe he’s also too big to fail, but this time he may be wrong.