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  • How To Create Bailouts Forever

    Treasury Secretary Timothy Geithner stumps for Sen. Chris Dodd’s (D-CT) finance reform bill in today’s Washington Post:

    As the Senate bill moves to the floor, we must all fight loopholes that would weaken it and push to make sure the government has real authority to help end the problem of “too big to fail.”

    Crucially, if a major firm does mismanage itself into failure, the Senate bill gives the government the authority to wind down the firm with no exposure to the taxpayer. No more bailouts.

    Excuse us if we don’t take the Secretary of Wall Street Bailouts’ word on this. To the contrary, what the Dodd bill actually does is create a new $50 billion fund to be used in “emergencies” for restructuring firms deemed too close to bankruptcy. And who gets to decide when there is an emergency and which firms are too close to bankruptcy?  You guessed it: Treasury Secretary Timothy Geithner. The Dodd bill is thus nothing less a permanent extension of Secretary Geithner’s TARP powers.

    But don’t take our word for it. Time reports:

    That’s why the government decided to bail out most of the nation’s largest banks at the height of the financial crisis. And here’s where the problem potentially gets worse. Once bankers understand that the government will bail out their firms when their loans or other financial bets go bad, they are likely to take riskier and riskier bets. That, of course, leads to more potential bank failures and more taxpayer funded bailouts.

    The Dodd bill was supposed to end all of this, and Senator Dodd says it does. Nonetheless, policy makers and economists say it’s far from clear that the proposed legislation solves the issue. Even members of the Federal Reserve, which gets a lot more power to regulate banks and financial products in the Dodd bill, are wary of the proposal’s ability to end too big to fail. Richmond Federal Reserve president Jeffrey Lacker recently said on CNBC that he believes the bill does little to stop future financial bailouts.

    A better solution for the “too big to fail” problem are bankruptcy courts. Peter Wallison and David Skeel write in The Wall Street Journal:

    There is another lesson in the Lehman bankruptcy. Mr. Dodd claims his bill cures the too-big-to-fail problem because it requires the liquidation of a failing firm. But Lehman has been liquidated; what is left is a shell that may or may not struggle back to profitability.

    Which system is more likely to eliminate the moral hazard of too big to fail? In a bankruptcy, as in the Lehman case, the creditors learned that when they lend to weak companies they have to be careful. The Dodd bill would teach the opposite lesson.

    Posted in Economics [slideshow_deploy]

    20 Responses to How To Create Bailouts Forever

    1. Pingback: » Financial News Update – 04/13/10 NoisyRoom.net: There are two ways to conquer and enslave a nation. One is by the sword, the other is by debt. John Adams

    2. Tim AZ says:

      Just more of the same liberal BS. Reward failure and punish success by socializing it. I bet they've been working on a list of companies they covet the most since Mao-Bama's inauguration. The lame stream media surely will be first to be acquired. After all how do you prop up a socialist regime without controlling the information the public is allowed to garner. Of course the internet must be brought under govt. control first. They will call it something that sounds benign like Net Nuetrality. Oh silly me that didn't pass the smell test in the court room. I guess they will have to repackage it and control it as though it were a utility.

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    4. Drew Page, IL says:

      “How To Create Bailouts Forever?” Simple, just keep the Democrats and the current administration in office.

    5. Bogdan Poland says:

      How to say….. You are on the way to socializm . Allow them to do more things like that ….The end Is know very well. You allow to destroy the great country and by the way the all modern world .Wake up. It is your country and you haven’t got another one

    6. Rebecca Koly says:

      maybe obama a nd his family 7FRIENDS WOULD like to live in his homeland just as michille after they to visit relatives shey Kenya was his home he could resign from well even hill pack thingskenya could surely did his it would have great if he read&unstood our country is run by the constitution have you ever readit Mr Mau Obabama dont forget to take comies with you that help you overther anywhere but in AMERICA

    7. Sean, Massachusetts says:

      I would have liked to see some specifics on the bill as written. This seems to be just some heresay aimed at Democrats. If I'm not crazy, it would seem that this is intended to bolster the Republican party.

    8. Margaret Haskell, Sa says:

      The greatest threat to corporate failure is Bankruptcy – period. If members of Congress knew anything about creating jobs and making money – they would not be in Congress. I do not think that most people realize the fundamental struggle that we are going through. Theorists are telling pragmatists how to solve our problems. The lust for legislative power has become an all encompassing pastime and it will destroy the greatest free economy of the world. There is only one cure.

    9. Margaret Harkrider, says:

      I never thought I would live to see the Government for the people , of the people destroyed. However this is what I see happening. Our elected officials have gotten far to comfortable in their positions and it is time to put term limits on congress as is on the President. Two terms and they go home without the fat pension and on the same health care as the rest of America. I truly believe the people will show the government who the real boss is in November.

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    12. Jim Clark 3675 Keyst says:

      KEEP THE GOVERNMENT OUT OF BUSINESS, Government does not know how to handle money, just look at what they have done in the past.

      If the business is going to fail let them fail. There will be plenty of Mr Gates, or Warren Buffet`s to pick up the piceses.

      If you think you don`t like this idea let ME spend some of your MONEY.

      PS TERM LIMITS?????????????????

    13. Jen, AZ says:

      Come Novemeber 2010, we have to remember how our government has treated us. We the people, can work on the house & get rid of a lot of folks in there & hopefully, in 2012, we will be able to clean out the rest of the mess in Washington, DC. I'm not giving up my thoughts in any way…but sometimes the best things come with time. I just hope & pray that our whole country will not be destroyed by the time our government gets finished with it.

    14. C.R. Donaldson says:

      It has always been amusing to me that those wealthy American capitalists who speak of capitalism with a religious ferver are the same ones who seek to corner markets, control prices, etc. They are also the first ones to verbally support federal bailouts as they maneuver to be first in line for their hand out. It would really be funny if it weren't so rhetorical.

    15. David Kersul, NYC says:

      When Obama was running for President, He was a little elephant supported

      by a lot of little left-wing elephants. Now He has turned into a Gigantic Elephant

      supported by Gigantic Government on the road using Miachiavellian style

      politics. Our Government is changing right under our eyes. Hitler and Stalin

      didn't become Monoliths overnight either. He is trying to tickle our ears with

      denial of Socialism by accomplishing step by step as if in a conversation between 2 close friends. When the results of this "Change" are through, the

      U.S. will be unrecognizable and then it will be too late. Peacefully, resist this


    16. Sandra K says:

      I really think the people in Washington DC (at least the people close to Obama and him self) hate this country. And there should be no company to big to fail. If the people in charge of finances can't figure out it does not pay to spend money you do not have. Well these people deserve to fail.

      Our house hold has a budget and we make it with in that budget. We do not expect any hand out. Capitalism is what makes us a great nation.

      I have a simple question for those who feel that the rich people are to blame for everything. Can you afford to build a large manufacturing company? Could you pay a large payroll to your workers? I will bet those whinning and dirt slinging on the rich will have to say NO they can't. It should be a no brainer–we both ends of the business world. And those that have know this! Its not their fault that the have nots include some that expect something for nothing. I am in the income bracket that falls with in the have nots–Yet I have worked hard for all my life for what I have. I resent the government for redistribution of what I have made. It may not be enough to rate as rich but it is mine and I will keep what it mine if I lose it due to poor judgement than so be it. I did it all my self.

    17. Robert, Houston says:

      The legislation is an obvious smokescreen. Since when have we needed laws other than our centuries old bankruptcy laws to allow bad businesses to fail? We don't need a new law. We need to apply the old ones.

    18. Mike Ryan Petal, MS says:

      This is not a response to the “How To Create Bailouts Forever”; it’s just my feelings

      I'm getting close to being ashamed of being an American citizen

      This used to be the BEST place on earth to live.

      My wife and I are considering retiring outside of the United States of America.

      How much more Tax can we afford. How many more Constitutional RIGHTS will be stolen from us illegally?

      It cost more to live now but since the “so called banking crisis”, my income has been cut in half.

      This is causing me to suffer from tremendous depression and though I vote and write letters to Congress and the Senate, I'm at a loss as to what to do.

      I'm NOT giving up my firearms that the constitution says I have the RIGHT to keep & bear.

      I'm scared!!!!!


    19. Donald Hauser says:

      Vote all the mushy politians who are afraid to state how they will vote out of office, Democrats, Republicans, whatever. They all eat from the same plate using the same fork. I am completely fed up will all of them. Stand firm Tea Party members and keep your powder dry!!!

      Donald Hauser

    20. Nick, Texas says:

      So, how else are we supposed to liquidate the large institutions without having a fund available to soften the blow to counterparties? We're not talking about local banks here. We're talking about huge institutions that fund banks, communities, and are counterparties to government borrowing. It's not like one of these institutions goes bankrupt and, poof, you get rid of them and it's all good. On a systemic level if one goes bankrupt and all the others get scared and stop lending to eachother in the federal funds market, or withdrawing deposits in institutions because they don't want to be the one exposed when the game of musical chairs stops, then you have a credit crisis, a financial meltdown, and a depression. Community banks would be wiped out. There would be no business loans, no home loans. Interest rates would skyrocket.

      Bottom line, there is still moral hazard with this fund. You could still wipeout the shareholders and require debtholders to renogiate their deals (which is a significant deterent in itself). You could require executive management to be personally responsible for a failing company effectively wiping them out in the event of failure.

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