The GSEs and “Too Big to Fail”
A version of this post originally appeared on the author’s blog.
The Romney/Ryan campaign released a white paper on Friday afternoon that lays out some of their approach to housing policy. As Brad DeLong observes, it’s hard to figure out what is scariest about this document. Below are two passages that stand out:
-Sensible, Not Overly Complex, Financial Regulation That Gets Credit Flowing Again: By replacing the Dodd-Frank Act with sensible regulation, a Romney-Ryan Administration will usher in a new era of responsible lending with sensible regulation to allow banks to approve loans to families with good credit rather than rejecting their mortgage applications.
-End “Too-Big-To-Fail” And Reform Fannie Mae And Freddie Mac: The Romney-Ryan plan will completely end “too-big-to-fail” by reforming the GSEs.
Some of the conceptual confusion here can be chalked up to poor grammar, I think, but it still raises an eyebrow. When you use “sensible regulation” to define itself, for instance, it’s unclear what the content of the proposed regulation actually is, other than the wholesale repeal of Dodd-Frank. But then there’s no explanation of why Dodd-Frank should be repealed in the first place. Perhaps it should be repealed, but the absence of a justification for doing that makes the claim circular.
If you want to end “Too Big To Fail” and reform the GSEs, that’s a noble goal. But there’s no way that such a plan could be respectably summarized in so few words. Moreover, is the goal to end “Too Big To Fail” and reform the GSEs, or to “end ‘too-big-to-fail’ by reforming the GSEs.” If the former, then those are two separate objectives each deserving their own plan. If the latter, then this really makes no sense. Do Romney and Ryan believe that reforming the GSEs would be sufficient to end TBTF, or is it just a good talking point? If so, why isn’t there any mention of the big banks, several of which received capital injections from the government during the financial crisis for fear they were too big to fail?
If the real problem that needs fixing here is TBTF, in other words, then that absolutely requires some policy prescription that affects the big banks. And given the heavy drum-beating on TBTF in this paper, you would think that Romney and Ryan would be proponents of Dodd-Frank in some shape or form, which imposes real safety constraints on the big banks:
The Dodd‐Frank Act requires that bank regulators establish heightened prudential standards for risk‐based capital, leverage, liquidity, and contingent capital. Systemically important institutions, which include the largest bank holding companies, will be subject to more onerous regulatory capital, leverage and other requirements, including a maximum debt‐to‐equity ratio of 15‐to‐1. The Collins Amendment provisions included in the Dodd‐Frank Act require the establishment of minimum leverage and risk‐based capital requirements.
But Romney and Ryan don’t like these policies or else they wouldn’t be calling for their replacement. But at the same time Romney and Ryan agree with the goal these policies seek to accomplish: ending TBTF. That’s not a realistic goal according to any economist or financial policy expert I’ve heard, and it’s also not the stated goal of Dodd-Frank (because it’s not realistic). But Romney and Ryan think it is a realistic goal, and they think that Dodd-Frank has already failed in this respect, and they think they have a better way to do this: reform firms like Fannie Mae and Freddie Mac while rolling back regulation on systemically significant financial institutions like Citi, JP Morgan, BofA, and Wells Fargo. Why it would make sense to deregulate some but not all potentially TBTF institutions while “reforming” others in order to achieve the broader policy goal of ending TBTF, is not explained.
It’s really hard to follow the reasoning here. Romney and Ryan are campaigning for the White House, not working for a policy think tank, so I don’t necessarily think they need to be realeasing wonky, technical proposals. But if they’re going to stick to pithy summaries, the grammar and conceptual flow need to at least be sound. Here they simply aren’t.