There’s a slightly odd fad on the left for really loving progressive-ish ideas when they come from a rightwinger. So there’s a lot of interest in Kansas City Fed President Thomas M. Hoenig’s tough views on bank regulation since he not only has tough views on bank regulation, he’s also a hard-core rightwinger. My view is that this is a bit backwards—Hoenig is a hard-core rightwinger whose overall views on monetary issues evince very little concern for the welfare of average people. To me, this makes his tough views on cracking down on Wall Street seem a bit to me like special pleading on behalf of the interests of medium-sized banks (his constituency in his role as Kansas City Fed president) rather than about the overall welfare of the country.

So with that somewhat skeptical preface, this aspect of his critique of Chris Dodd’s bill does seem worthy of concern:

“What I worry about [is] if you have a large institution, and it got into very serious trouble and you only have a weekend to take care of it, the procedures under the Dodd bill would make that very difficult,” Hoenig said.

“Let’s say you were coming into Monday morning and you didn’t have the ability to get to the judges in time to get this thing approved, and you had to get to another day. What you would tend to do is lend to that institution — if it were not a commercial bank, you would even use the [Fed's] so-called 13-3 authority… and you would lend to it,” he said in a reference to the legal authority that the Fed claimed gave it the power to lend taxpayer money to AIG. “So you would still have it as an operating bank, you would not have taken control of it, not put it in receivership yet, and yet you would be bailing it out. That’s what we have to avoid.

“There’s still this desire to leave discretion in the hands of the Secretary of the Treasury, and while I understand that desire — because you never know what the circumstance is going to be — the problem is in those circumstances you always take the path of least resistance because of the nature of the crisis.

“You don’t want to be the person responsible for the meltdown, so you take the exception and you move it through.”

The establishment of a resolution procedure for dealing with failures at diversified financial institutions seems to me to be the best and most important part of Dodd’s bill. Except it’s not good or important if it doesn’t actually work! It certainly seems to be the intention of Dodd and his staff to set something up that works, which is good. But whether or not it’s actually the case that what they’ve written will work is something that it’s difficult for me to judge. The fact that a bank regulator with Hoenig’s level of experience thinks it won’t is a major red flag.

This is definitely something we’re going to need to hear more about, because at first blush I don’t see any reason to think that half-measures in this regard have real value. The process is either something workable or it isn’t.

In most ways, the vast quantity and heft of conservative institutions is a huge advantage to the conservative movement. But times do come when I think it becomes a problem for the right—in essence people can get caught up in believing their own propaganda, and/or dissonant factual information winds up not reaching people who’d be interested in it. And watching the various state-level efforts to nullify the Affordable Care Act it occurs to me that that’s part of what’s happening here.

What I have in mind specifically is that fact, widely understood but discussed mostly in private in progressive circles, that ACA will effectuate a vast transfer of resources away from “blue” states and toward “red” states. Not by design, obviously, but simply because it’s in the nature of the program to transfer resources away from rich people and toward non-seniors with below-average incomes. And the geography of income in America is such that most of the people with below-average incomes are living in the more conservative states.

In principle you could try to design the bill to tilt away from that outcome, but Arkansas, Louisiana, and Montana are among the ten poorest states and those states’ Democratic Senators were integral to getting the thing done (New Mexico is also in the bottom ten, though I don’t think its Senators were really pivotal players). Consequently, if states like Alabama, Mississippi, Kentucky, Oklahoma, Tennessee, and South Carolina were to succeed in somehow exempting themselves from the ACA they’d basically be turning down free money for no reason. To be clear “this will send money to my state” isn’t a good reason for a member of congress to support a bill that he honestly believes is bad for the country, and conservative voters are the richer residents of the poorer states, but it’s absurd for governors and state legislators to be trying to find ways to turn down what amounts to a gift to their states.

Jay Ackroyd complained yesterday that my posts on financial regulation “are typical, they assume a policy objective of banks too big to fail.” I wouldn’t put it that way. Rather, I would say that despite the prominence of the term “too big to fail,” the bigness of banks really doesn’t have much to do with the fact that it’s dangerous to simply let banks fail. And you don’t need to take my word for it, ask Paul Krugman:

The point is that breaking up the big players, then saying that it’s OK to let banks fail because no one player is crucial to the system is not a solution.

Tim Fernholz has spelled this out at greater length. Or think about the FDIC—when a bank goes into the FDIC closure process, we say that it’s “failed” but we don’t submit it to the bankruptcy process and depositors all get their money. And this is extended to even the smallest of banks. The issue is that having banks go bankrupt is systemically disruptive no matter how big or small the banks are. What’s appealing about the way small, traditional banks are treated in the United States isn’t that they “fail” (i.e., go bankrupt) it’s that the FDIC process doesn’t lead to a bailout of bank managers or bank owners. But even if we cut the “shadow bank” players down to size, we’d still need to come up with a new regulatory/resolution framework.