President Barack Obama's favorite rhetorical device is to lecture the American people about what are and are not "legitimate" public policy arguments. So throughout the health care debate, President Obama insisted that it was "not legitimate" to claim that "a public option is somehow a Trojan horse for a single-payer system." This despite the fact that Reps. Barney Frank (D-MA), Jan Schakowsky (D-IL), Anthony Weiner (D-NY) and Nobel Prize winning New York Times columnist Paul Krugman were all caught on video explaining to single-payer advocates that the public option was exactly that.
Now the President is bringing the same audacity to the health care debate, telling a handpicked audience at New York's Cooper Union: "Now, there is a legitimate debate taking place about how best to ensure taxpayers are held harmless in this process. But what is not legitimate is to suggest that we're enabling or encouraging future taxpayer bailouts, as some have claimed. That may make for a good sound bite, but it's not factually accurate."
Before President Obama continues to go around accusing others of lacking legitimacy, he should read the official cost estimate of the financial regulation bill released by the Congressional Budget Office last Thursday. Assessing the budgetary impact of the $50 billion that "systemically important financial firms" would have to pay in assessments to pay for the bill's "Orderly Resolution Fund," the CBO writes:
The total amount collected from assessments is estimated to be about $58 billion through 2020. But such assessments would become an additional business expense for companies required to pay them. Those additional expenses would result in decreases in taxable income somewhere in the economy, which would produce a loss of government revenue from income and payroll taxes that would partially offset the revenue collected from the assessment itself.
In other words, these financial firms have to get that $58 billion dollars from somewhere, and that somewhere is you. Now the Obama administration may argue that they actually oppose the creation of the resolution fund. But American taxpayers should be even more frightened when they find out why the Obama administration opposes it. The New York Times reports: "The Obama administration does not support the $50 billion fund, partly out of concern that more money may be needed if one or more big financial firms ever collapse and that creating a fund could make it difficult to authorize more money." AEI's Peter Wallison details CBO how this provision could put taxpayer on the hook for much larger sums:
If the Dodd-Obama resolution plan is ever actually put to use, the direct or indirect costs could be many times greater. For example, the bill authorizes the Federal Deposit Insurance Corporation to borrow from the Treasury "up to 90 percent of the fair value of assets" of any company the FDIC is resolving. Yet one institution alone—Citigroup—has assets currently valued at about $1.8 trillion. The potential costs of resolving it (not to mention others) would be spectacularly higher than $50 billion. In short, the $50 billion in the resolution fund is a political number—a fraction of what the FDIC is authorized to borrow and spend.
Why would this vast sum be necessary? The Dodd bill has one answer. It says that the FDIC "may make additional payments," over and above what a claimant might be entitled to in bankruptcy, if these payments are necessary "to minimize losses" to the FDIC "from the orderly liquidation" of the failing firm.
In other words, the agency would be able to borrow huge sums so that it could make more generous payments to creditors than they would receive in a bankruptcy. Generous payments to creditors would certainly make unwinding a firm "orderly"—but it would also encourage lending to the too-big-to-fail financial institutions while disadvantaging smaller, less favored institutions. This in itself will have a profound and destructive effect on competition.
This is the core problem of the Dodd-Obama Wall Street Bailout Bill: it gives the same regulators that missed the beginning of the last crisis the authority to engineer the exact same politically motivated bailouts (see General Motors, Chrsyler) for the next one.
There is a better way. Congress should modernize bankruptcy laws to create an expedited method to restructure and close large and complex financial firms. Such an approach would not give regulators virtually unlimited powers and would free the process from political interference by giving control to an unbiased court system that already has extensive experience with complex modern firms.
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