By Simon Johnson

With the presidential election looming and both sides looking for a knockout blow in the vice-presidential debate on Thursday evening, now is a good time for both Democrats and Republicans to look for one more defining issue. The new book by Sheila Bair, “Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself,” offers exactly that – to whichever party is smart enough and fast enough to take up the opportunity.

Ms. Bair lays out a compelling vision for both financial-sector reform and for dealing with the continuing mess around mortgages. Neither presidential campaign is likely to endorse her ideas in all their specifics. But if a candidate signaled that he had read and understood the main messages in this book, this would have great appeal both with undecided centrist votes and – importantly – with their respective bases.

Ms. Bair was chairwoman of the Federal Deposit Insurance Corporation from June 2006 until July 2011. In that position, she had a seat at the table for all the big decisions during the financial crisis of 2007-9, and she was also an important player during the financial reform negotiations of 2009-10, leading up to the Dodd-Frank financial reform legislation of 2010.

(Disclosure: I’m a member of the nongovernmental Systemic Risk Council that Ms. Bair created and leads; I was also appointed to the F.D.I.C.’s Systemic Resolution Advisory Committee while Ms. Bair was still chairwoman.)

Ms. Bair, a Republican from Kansas, worked with Bob Dole and was appointed to the F.D.I.C. by President George W. Bush. Her defining positions were against the interests of the very largest financial institutions.

And her biggest confrontations were with Treasury Secretary Timothy Geithner, the former president of the Federal Reserve Bank of New York, and – according to Ms. Bair – someone who continually favored the largest banks and their profitability in the mistaken view that this would serve the broader social interest in financial stability and sustained economic prosperity.

During the height of the financial crisis, Mr. Geithner wanted at various times to commit more taxpayer resources with fewer conditions to support very large banks, including allowing them to pay very large bonuses to executives. Ms. Bair was consistently on the side of wanting more strings attached – the point being that these financial institutions had managed themselves into great trouble. As she notes on Page 363:

“An institution that is profitable is not necessarily one that is safe and sound or one that is serving the public interest. All of the large financial institutions were profitable in the years leading up to the crisis, but they were making big profits by taking big risks that ultimately exploded in their – and our – faces.”

Ms. Bair’s point was not about any kind of retribution but rather that the long experience of the F.D.I.C. indicates that the best time to clean up any financial sector mess is at the moment and point of intervention. Because it has insured small depositors – the public – since the 1930s, the F.D.I.C. has developed a well-informed approach to failing banks. It works long and hard to ensure that depositor protection works – and it does – without imposing costs on the taxpayer.

When I worked at the International Monetary Fund during 2004-6 and 2007-8, we regarded the F.D.I.C. as carrying out best practice in the world with regard to how to handle failing banks.

In Ms. Bair’s persuasive account, both the George W. Bush and Barack Obama administrations were primarily focused on protecting the large banks. Both administrations consistently ignored the relationship between the need to fix our bloated, free-wheeling financial sector and sustaining our broader economic prosperity. And both administrations paid insufficient attention to the persistent problem of mortgages.

In most financial crises, there is some form of “debt overhang” problem – meaning that the economy cannot fully get back on its feet until loans are written down, typically through some form of bankruptcy or negotiated restructuring process. Some of the most fascinating details in “Bull by the Horns” concern instances when Ms. Bair and her F.D.I.C. colleagues proposed various ways to deal with mortgages, only to be shot down or undermined by Mr. Geithner and his colleagues at Treasury (see, for example, Chapter 21).

Judging from the most recent presidential debate, the candidates are still not drawing the link from stable finance to economic prosperity, and they are offering no ideas on how to restructure mortgages.

As new cases are brought against big banks for their mortgage-lending practices – including JPMorgan Chase (for activities of Bear Stearns, which it acquired in 2008) and, this week, Wells Fargo – policy thinking increasingly must grapple with how to structure a potential “global settlement” on mortgages.

Hopefully, Ms. Bair will have a seat at that table; most of the workable ideas are already articulated in her book.  More broadly, her policy suggestions are simple and obvious, such as: putting tougher limits on the ability of large financial institutions to take risks with borrowed money; requiring those who securitize mortgages to retain risk if the mortgages later default; and breaking up institutions which are so large and interconnected that they cannot be resolved in bankruptcy without causing wider damage to our economy.

Ms. Bair’s messages and common sense have appeal across the American political spectrum. The right wants an end to implicit government subsidies for large financial institutions. The left wants to curtail the power of global megabanks. Independents want Wall Street to have less political sway in Washington. These are all reasonable and responsible requests.

Either Mr. Romney or Mr. Obama could seize upon the themes in Ms. Bair’s book, craft these into political language and hammer home the substance in the concluding weeks of the campaign.

Or they could just quote the final paragraph of the book:

“Life goes on, as Robert Frost observed. But financial abuse and misconduct don’t have to. Tell the powers in Washington that you want these problems fixed, you want them fixed now and that you will hold all incumbents accountable until the job is done.”

An edited version of this post appeared on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire column, please contact the New York Times.

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