3.29.2010

Krugman: GOP Will Follow Frank Luntz Plan to Derail Financial Reform

In today's NY Times, Paul Krugman explains how the financial system broke down:

[...] 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 that they didn’t take advantage of government guarantees by running excessive risks.

From 1980 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 — like financing long-term investments with overnight borrowing — that recreated the risks of old-fashioned banking but weren’t covered either by guarantees or by regulation. The result, by 2007, was a financial system as vulnerable to severe crisis as the system of 1930. And the crisis came.

Krugman then explain that the GOP has no intention of letting the President & Democrats fix the mess that they were most responsible for creating in the first place:

In the Senate, the legislation on the table was crafted by Senator Chris Dodd of Connecticut. It’s significantly weaker than the Frank bill, and needs to be made stronger, a topic I’ll discuss in future columns. 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 (which they are)? Maybe not. Back in January, Frank Luntz, the G.O.P. 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 on the banks.

Sure enough, a few days ago Senator Richard Shelby of Alabama, in a letter attacking the Dodd bill, claimed 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: whatever people like Mr. Shelby may say now, in any future crisis those firms will be rescued, whichever party is in power.

read more...

Bookmark and Share

blog comments powered by Disqus