House Budget Committee Chairman Rep. Paul Ryan, R-Wis., speaks about his budget plan, Tuesday, March 20, 2012, during a news conference on Capitol Hill in Washington. (AP Photo/Jacquelyn Martin)
The 2013 House Republican budget – released last week by Budget Committee Chairman Paul Ryan – includes a significant amount of language meant to convince readers that the GOP is really fed up with “crony capitalism” and, more emphatically, bailouts. And the Republicans reserve special ire for the Dodd-Frank financial reform law signed by President Obama in 2010, calling it a continuation of the bailout culture.
“While the authors of the Dodd–Frank Act went to great lengths to denounce bailouts, this law only sustains them,” the budget reads. “Developments in the area of financial–services regulation, including the Dodd-Frank Act…will further deter economic expansion, invite political corruption and degrade self-government.”
But while House Republicans call for repealing their other big target, President Obama’s health care reform law, in its entirety, they leave most of the Dodd-Frank law alone. For instance, the much-maligned Consumer Financial Protection Bureau didn’t merit a mention in the budget, even though the Republicans fought against it tooth-and-nail during the Dodd-Frank debate. Neither did the new regulatory regime for derivatives. Ditto for the Volcker rule, meant to rein in banks’ risky trading.
Instead, the Republican budget calls for repealing what’s known in Dodd-Frank as “resolution authority”: the mechanism for dismantling failing financial firms without resorting to the ad hoc bailouts of 2008. And this specific targeting leaves little doubt that the Republicans have far more interest in pledging fealty to the financial services industry than in truly eliminating bailouts or avoiding a repeat of the 2008 financial crisis.
It’s worth revisiting the situation in September 2008 for just a moment. By the middle of that month, Lehman Brothers had declared bankruptcy, while Merrill Lynch had been sold, shotgun-wedding style, to Bank of America. In the wake of Lehman’s collapse, credit froze. Just days later, mega-insurer American International Group received a $85 billion bailout from the Federal Reserve when it became clear that the firm couldn’t honor billions of dollars in credit default swaps.
Wall Street was panicked and the financial system was on the verge of melting down. To combat the impending collapse, then-Treasury Secretary Hank Paulson and the Bush administration rolled out the publicly reviled Troubled Asset Relief Program (TARP). While initially planned as an asset-purchasing program – under which the government would buy so-called toxic assets from the nation’s biggest banks – TARP turned into a straight injection of capital into those firms. It was a handout with few strings attached. "I’ve abandoned free-market principles to save the free-market system," President Bush said a few months later.
Lehman’s collapse had shown that Wall Street’s behemoths were too large and intertwined with each other to enter into a traditional bankruptcy without causing significant liquidity problems and destabilizing financial markets. So the government was left with the unenviable choice of injecting capital directly into the banks, thereby keeping them afloat, or risking another Great Depression.