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The Case for Financial Reform

Making the best of a bad situation.

1:53 PM, Apr 7, 2010 • By MATTHEW CONTINETTI
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2. Bank size is a political issue, not an economic one. As I wrote yesterday, you could still have financial panics with many small banks instead of several giant ones. The question is whether we want to live in a society where a few big banks exert tremendous control over the financial sector and political life. The debate over the size and concentration of American financial institutions is long-standing. Put me down on the side that supports dispersed power, local control, and the inability of Goldman Sachs to dictate how it ought to be regulated.

3. Resolution Authority is not the same as a bailout. When the FDIC seizes a failed bank, do we say that the bank has been bailed out? Of course not. So creating a mechanism by which the government can put into receivership a financial institution that is not a bank, but has bank-like characteristics, is not the same thing as mandating endless bailouts. As Sheila Bair wrote in yesterday's Journal, "The disorderly Lehman collapse and the AIG bailout cannot be our only models. The FDIC-style process represents a proven, third way." We should try to emulate it as we deal with the problem of Too Big to Fail.

4. Financial reform is not necessarily a big government issue. The American people are increasingly disenchanted with the Obama Democrats' approach to public policy. The public rightly believes the stimulus failed to achieve its goal of job creation. The public opposed health care reform as a risky and costly attempt to alter arrangements that satisfy the great majority of Americans. A center-right coalition has emerged that disapproves of this president and cannot wait to throw the Democrats out of Congress. Republicans are understandably thrilled. For the first time in a long time, they feel the wind at their backs.

Because the Republicans have paid no cost for opposing this president, they may be tempted to stand athwart any financial reform bill that comes up for a vote, no matter how sensible some of its ideas may be. That would be misguided. The public may not like the solutions the Democrats have put forward to address America's problems, but that does not mean it suddenly has fallen in love with Vikram Pandit, Jamie Dimon, and Lloyd Blankfein.

When Joe Six Pack reads the paper, he learns about a group of insiders at one end of the DC-NYC megalopolis bailing out insiders at the other end. He has little affection for both. If the GOP is serious about becoming the party of the people, serious about shifting power from Washington and New York, serious about unleashing competition and favoring the innovator over the incumbent, why not back free-market measures against an entrenched financial elite?

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