The Real Conservative Opportunity This NovemberSimon Johnson
Aug. 20 (Bloomberg) -- Fighting November’s U.S. presidential election on Paul Ryan’s Medicare plan is unlikely to go well.
The ideas don’t please the right -- former Ronald Reagan budget director David Stockman and others are displeased because Ryan would keep Medicare in part and largely postpone the effects of any change. Yet the same proposals greatly animate the left -- it can credibly claim that Ryan, the House Budget Committee chairman and Republican vice-presidential pick, would partially dismantle Medicare.
On top of this, Ryan’s plan won’t even satisfy the center, when independents apply any kind of reasonable scrutiny. The Congressional Budget Office scores his proposals as likely to increase health-care costs as a percent of gross domestic product -- because it would reduce government pooling of insurable risks.
The big opportunity for presumptive Republican presidential nominee Mitt Romney and for conservatives more broadly is to choose this moment to pivot against big banks. Ryan is plugged into the Tea Party wing of the Republican Party, which has been consistently opposed to megabanks and the subsidies they attract through being too-big-to-fail (talk to Representative Ron Paul).
Ryan can draw on the intellectual support of senior figures in the Republican Party -- including former Utah Governor Jon Huntsman, the presidential candidate who had the strong support of the Wall Street Journal editorial page for his approach to breaking up the megabanks. Senator Richard Shelby -- ranking Republican on the Senate Banking Committee -- is cagier, but seems inclined to be skeptical of the value of the largest banks as currently constituted. Two weeks ago, Senator David Vitter co-wrote a brilliant letter to Federal Reserve Chairman Ben S. Bernanke on the problems the banks pose.
In addition to politicians, the emerging consensus among heavyweight Republican intellectuals is that bigger banks should be forced to fund themselves with much more equity relative to debt -- in other words, capital requirements should be significantly higher for any financial firm whose failure can cause broad damage. The argument is that too-big-to-fail is too-big-to-exist and the right way to pressure banks to break up is through capital requirements that increase along with a bank’s size.
A Romney-Ryan ticket has the opportunity to tap the Republican populist tradition (think Teddy Roosevelt). The megabanks -- such as Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. -- have become today’s government-sponsored enterprises. They receive large, opaque and dangerous subsidies, encouraging them to engage in excessive risk taking. The question is how best to remove those subsidies.
After a summer of scandals -- JPMorgan’s $6 billion loss and Barclays Plc’s Libor debacle -- there’s growing recognition these banks are too big to manage. HSBC Holdings Plc and Standard Chartered Plc have both acknowledged violating U.S. laws on financial transactions with Iran and other rogue states, their defense being that executives didn’t know what was going on in their own sprawling empires.
When you employ 300,000 or so people across 100 or more countries, it’s easy for things to get out of control. And when the government provides implicit guarantees, no one has an incentive to be sufficiently careful.
One hundred years ago, the industrial and railroad “trusts” that Teddy Roosevelt took on were relatively well-run paragons of efficiency. The original J.P. Morgan -- confronted by Roosevelt in his first big Sherman antitrust case -- didn’t blow up his bank, do great damage to the American economy, and need to be rescued at an enormous expense to the taxpayer. The titans of Wall Street and industry were held accountable by Roosevelt for price fixing and generally gouging customers through monopolistic behavior. That policy was both sensible economics and a great vote-getter.
The objections to taking this approach are that it would fly in the face of Ryan’s convictions, his voting record and his donors. All of these can be overcome.
Ryan wants to abolish the resolution powers created by the Dodd-Frank financial law, but this is a weak position from which he can walk back. Even most of the industry is not opposed to the existence of this authority (as the strong think they can use it to take over the weak). In terms of voting, Ryan voted for the Troubled Asset Relief Program -- which bailed out the banks -- but it was in a time of crisis, and a Republican president asked him to do it.
The most serious obstacle is that Ryan’s (and Romney’s) big donors include major players from the financial sector (who have generally been supportive of the Tea Party due to convergent views on taxes). But if Republicans turn on the too-big-to-fail banks, where will they go? The megabanks have burned too many bridges with the Democrats.
As Huntsman put it, we need to re-establish a free market in financial services. There is currently no market -- just subsidies and crony capitalism. True conservatives should all want the megabanks to break up, becoming small enough and simple enough so they can fail -- without any kind of government or central-bank bailout.
(Simon Johnson, a professor at the MIT Sloan School of Management as well as a senior fellow at the Peterson Institute for International Economics, is co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.” The opinions expressed are his own.)
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