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Resolution Authority: What's Wrong With the Republicans' Argument

posted by Adam Levitin

The Senate Republicans are arguing that resolution authority, including a $50B resolution fund, would institutionalize bailouts.  Implicit in this argument is the belief that without such resolution authority or fund there would not be bailouts.  This is a demonstrably false position. 

There is no way to credibly commit to not having bailouts.  Our current system is to have bankruptcy/FDIC as a default resolution system and bailouts as need be.  Creating resolution authority is hardly going to mean that there will be bailouts where there were none.  We already have bailouts.  Exhibit 1:  the TARP, which was passed with the votes of 33 Senate Republicans (including Mitch McConnell, who has taken the lead in making this silly argument against resolution authority). 

To be sure, Congress could pass a “no bailouts” law. But see how much good that did the EU:  its no bailouts law hasn't prevented the EU from bailing out Greece (contingently).  If Congress gets scared enough it will bail.  Better, then to have a clear and responsive mechanism for doing the bailout.  No matter how well we do risk regulation, bailouts will be inevitable from time-to-time.  Given that reality, we might as well do them well, and an institutional structure is critical for this.  (If you want to read the long version of this argument, you can read my paper, In Defense of Bailouts here.)

Let me be clear, though, while the Republican argument against resolution authority is silly, there is a lot to criticize about the proposed resolution authority, in both the House and especially the Senate bills.  I'll take this up in a subsequent post. 

Comments

You are using the word "bailout" to describe both money given to wind down a failed institution smoothly and spending money to maintain that institution as a going concern. I think the latter is a "bailout" but not the former. The resolution authority is in the former category, recognizing that just like when the FDIC shuts down a small bank, there are expenses that may be significant.

The key difference to me is that when the FDIC does its thing, and when the resolution authority -- if enacted -- would go through its own process, the existing management and shareholders are wiped out, and haircuts administered to other creditors as well.

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