The administration is putting a lot of eggs in the resolution authority basket — the idea that, if it gets the power from Congress, it can take over large banks and wind them down, sell them off, or run them temporarily without taking the financial system down. I agree that taking over Citi last winter would have been preferable to what did happen. But I wrote somewhere (sorry, can’t find it now) that resolution authority has a political problem — if, say, JPMorgan Chase runs into trouble five years from now, how much confidence do we have that the government would actually invoke the power and take over the bank when push comes to shove? Even if a Democratic administration were in place, the executives at JPMorgan would scream bloody murder, as would the Republican Party, and the administration would have to decide if it wants to fight that political battle (“Socialism!!!”) before pulling the trigger.
Adam Levitin has a more thought out variant on this concern that I just found. Here’s his bottom line:
“[I]n most failures of too-big-to-fail institutions, the government will have to provide funding for the resolution, and this makes the resolution a political issue. For this reason alone, I think we are kidding ourselves if we believe that we can regularize the resolution of systemically important institutions. It would be great if we could regularize too-big-to-fail resolution, but I don’t think it is possible to come up with any set of rules that we won’t break at the first sign of them creating distributional results that we do not like. “
I’m not saying the government shouldn’t have resolution authority; I’m just saying we shouldn’t assume that it will solve our problems.
By James Kwak