I talked to a lot of people tonight at Drinking Liberally, including Duncan (we didn’t wrestle), and my take on the general mood is that people’s number one priority is that we fix the too-big-to-fail problem. Most people are somewhat agnostic about the right way to proceed on the banking crisis. But the one point they’re clear on is that when this is all over they do no want to see any financial institutions still standing that are so big that their failure could produce systemic risk.
For some people, their concern about this is so great and their level of trust is so low, that they don’t want to see any rescue plan at all until the banks are broken up into smaller parts. Some people worry that a successful rescue plan will actually prevent us from doing the reform that is needed to prevent a recurrence.
Unfortunately, we aren’t going to be able to get that preferred sequence. The rescue plan is going to get started and the reform elements will follow on. But that doesn’t mean we can’t or won’t get the reforms we need. There is nothing inconsistent about saving a CitiGroup from insolvency and then carving it up anyway. We could force the breakup through some kind of a restoration of the Glass-Steagall Act, or something like it.
Some reforms can be done as pure regulation, but we probably need legislation on top of that. And legislation takes time. You have to have hearings and then you have to craft the legislation and make all the compromises needed to get it passed. It’s unrealistic to think we can get all that done in a few weeks. So, we’re going to do it this way and it will be our job to make sure that the reform has support and that it doesn’t get eviscerated by lobbyists for the bad guys.
