Springtime for Bankers

http://www.nytimes.com/2011/05/02/opinion/02krugman.html

By PAUL KRUGMAN
Published: May 1, 2011

Last year the G.O.P. pulled off two spectacular examples of bait-and-switch campaigning. Medicare, where the same people who screamed about death panels are now trying to dismantle the whole program, was the most obvious. But the same thing
happened with regard to financial reform.

As you may recall, Republicans ran hard against bank bailouts. Among other things, they managed to convince a plurality of voters that the deeply unpopular bailout legislation proposed and passed by the Bush administration was enacted on President Obama’s watch.

And now they’re doing everything they can to ensure that there will be even bigger bailouts in years to come.

What does it take to limit future bailouts? Declaring that we’ll never do it again is no answer: when financial turmoil strikes, standing aside while banks fall like dominoes isn’t an option. After all, that’s what policy makers did in 1931, and the resulting banking crisis turned a mere recession into the Great Depression.

And let’s not forget that markets went into free fall when the Bush administration let Lehman Brothers go into liquidation. Only quick action — including passage of the much-hated bailout — prevented a full replay of 1931.

So what’s the solution? The answer is regulation that limits the frequency and size of financial crises, combined with rules that let the government strike a good deal when bailouts become necessary.

Remember, from the 1930s until the 1980s the United States managed to avoid large bailouts of financial institutions. The modern era of bailouts only began in the Reagan years, when politicians started dismantling 1930s-vintage regulation.

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Back in February G.O.P. legislators admitted frankly that they were trying to cripple financial reform by cutting off funding. And the recent House budget proposal, which calls for privatizing and voucherizing Medicare, also calls for eliminating resolution authority, in effect setting things up so that the bankers will get as good a deal in the next crisis as they got in 2008.

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To see what’s really going on, follow the money. Wall Street used to favor Democrats, perhaps because financiers tend to be liberal on social issues. But greed trumps gay rights, and financial industry contributions swung sharply toward the Republicans in the 2010 elections. Apparently Wall Street, unlike the voters, had no trouble divining the party’s real intentions.

And one more thing: by standing in the way of regulations that would limit future financial crises, Republicans are giving further evidence that they don’t really care about budget deficits.

For our current deficit is overwhelmingly the result of the 2008 financial
crisis, which devastated revenue and
increased the cost of programs like unemployment insurance. And while we managed to avoid large direct bailout costs (a fact not appreciated in public debate), we might not be lucky next time.

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