The Kansas City Star (Sunday) - - OPINION - PAUL KRUGMAN

Health re­form is the law of the land. Next up: fi­nan­cial re­form. But will it hap­pen? The White House is op­ti­mistic, be­cause it be­lieves that Repub­li­cans won’t want to be cast as al­lies of Wall Street. I’m not so sure. The key ques­tion is how many se­na­tors be­lieve that they can get away with claim­ing that war is peace, slav­ery is free­dom and reg­u­lat­ing big banks is do­ing those banks a fa­vor. We used to have a work­able sys­tem for avoid­ing fi­nan­cial crises, rest­ing on a com­bi­na­tion of gov­ern­ment guar­an­tees and reg­u­la­tion. On one side, bank de­posits were in­sured, pre­vent­ing a re­cur­rence of the im­mense bank runs that were a cen­tral cause of the Great De­pres­sion. On the other side, banks were tightly reg­u­lated, so they didn’t take ad­van­tage of gov­ern­ment guar­an­tees by run­ning ex­ces­sive risks. From1980 or so on­ward, how­ever, that sys­tem grad­u­ally broke down, partly be­cause of bank dereg­u­la­tion, but mainly be­cause of the rise of “shadow bank­ing”: in­sti­tu­tions and prac­tices — such as fi­nanc­ing long-term in­vest­ments with overnight bor­row­ing — that recre­ated the risks of old­fash­ioned bank­ing but weren’t cov­ered ei­ther by guar­an­tees or by reg­u­la­tion. As a re­sult, by 2007 the fi­nan­cial sys­tem was as vul­ner­a­ble to se­vere cri­sis as the sys­tem of 1930. And the cri­sis came. Now what? We have al­ready, in ef­fect, recre­ated New Deal­type guar­an­tees: As the fi­nan­cial sys­tem plunged into cri­sis, the gov­ern­ment res­cued trou­bled fi­nan­cial com­pa­nies, to avoid a com­plete col­lapse. And you should bear in mind that the big­gest bailouts occurred un­der a con­ser­va­tive Repub­li­can ad­min­is­tra­tion, which claimed to be­lieve deeply in free mar­kets. There’s ev­ery rea­son to be­lieve that this will be the rule from now on: When push comes to shove, no mat­ter who is in power, the fi­nan­cial sec­tor will be bailed out. In ef­fect, debts of shadow banks, like de­posits at con­ven­tional banks, now have a gov­ern­ment guar­an­tee. The only ques­tion is whether the fi­nan­cial in­dus­try will pay a price for this priv­i­lege, whether Wall Street will be obliged to be­have in re­turn for gov­ern­ment back­ing. And who could be against that? Well, how about John Boehner, the House mi­nor­ity leader? Re­cently Boehner told bankers to balk at ef­forts by Congress to im­pose stricter reg­u­la­tion. “Don’t let those lit­tle punk staffers take ad­van­tage of you, and stand up for your­selves,” he urged. By “tak­ing ad­van­tage” he meant im­pos­ing con­di­tions on the firms in re­turn for gov­ern­ment back­ing. Bar­ney Frank, the chair­man of the House Fi­nan­cial Ser­vices Com­mit­tee, promptly had “Lit­tle Punk Staffer” but­tons made up and dis­trib­uted to con­gres­sional aides. But Boehner isn’t the prob­lem: Frank has al­ready shep­herded fairly strong fi­nan­cial re­form through the House. In­stead, the ques­tion is what will hap­pen in the Se­nate. The Se­nate leg­is­la­tion, though drawn up by Sen. Chris Dodd of Con­necti­cut, is sub­stan­tially weaker than the Frank bill and needs to be made stronger. But no bill will be­come law if Se­nate Repub­li­cans stand in the way of re­form. But won’t op­po­nents of re­form fear be­ing cast as al­lies of the bad guys? Maybe not. Back in Jan­uary, Frank Luntz, the GOP strate­gist, cir­cu­lated a memo on how to op­pose fi­nan­cial re­form. His key idea was that Repub­li­cans should claim that up is down — that re­form leg­is­la­tion is a “big bank bailout bill,” rather than a set of re­stric­tions. Sure enough, a few days ago Sen. Richard Shelby of Alabama, in a let­ter at­tack­ing the Dodd bill, as­serted that an es­sen­tial part of re­form — tougher over­sight of large, sys­tem­i­cally im­por­tant fi­nan­cial com­pa­nies — is ac­tu­ally a bailout, be­cause “the mar­ket will view th­ese firms as be­ing too big to fail and im­plic­itly backed by the gov­ern­ment.” Um, se­na­tor, the mar­ket al­ready views those firms as hav­ing im­plicit gov­ern­ment back­ing, be­cause they do. In any fu­ture cri­sis those firms will be res­cued, whichever party is in power. The only ques­tion is whether we’re go­ing to reg­u­late bankers so they don’t abuse the priv­i­lege of gov­ern­ment back­ing. And it’s that reg­u­la­tion — not bailouts — that re­form op­po­nents are try­ing to block. So it’s the punks ver­sus the plu­to­crats — those who want to rein in ru­n­away banks, and bankers who want the free­dom to put the econ­omy at risk, free­dom en­hanced by the knowl­edge that tax­pay­ers will bail them out in a cri­sis. What­ever they say, the fact is that peo­ple like Shelby are on the side of the plu­to­crats. The Amer­i­can peo­ple should be on the side of the punks, who are try­ing to pro­tect their in­ter­ests.

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