Yglesias

Bair: Reform Bill Ends Bailouts

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Sheila Bair explains that the regulatory reform bill will end bailouts and that Mitch McConnell and others who say it institutionalizes them are lying:

Would this bill perpetuate bailouts?
SHEILA BAIR: The status quo is bailouts. That’s what we have now. If you don’t do anything, you are going to keep having bailouts. Bankruptcy doesn’t work — we saw that with Lehman Brothers.

But does this bill stop them from happening?
BAIR: It makes them impossible and it should. We worked really hard to squeeze bailout language out of this bill. The construct is you can’t bail out an individual institution — you just can’t do it.

In a true liquidity crisis, the FDIC and the Fed can provide systemwide support in terms of liquidity support — lending and debt guarantees — but even then, a default would trigger resolution or bankruptcy.

As I said this morning, there are some questions as to whether the process the Dodd bill sets up is genuinely 100 percent airtight. But there can be no denying that it makes bailouts less likely. Some conservatives are trying to outline alternative approaches to this goal, but what McConnell and John Boehner have on the table is a policy of make believe—don’t regulate banks, let Wall Street run wild, pretend there won’t be bailouts, then when the casino goes bust show up with a bailout.