My TRB column on Frank Luntz has raised the hackles of National Review's Kevin D. Williamson, who has an incredulous response entitled, "Yes, Jonathan Chait, It's a Bailout Bill." I should first note that my column was primarily about Luntz, and only secondarily about Luntz's bizarre notion that financial reform would cause bailouts. Bailouts, of course, are essentially the current default policy. We had a huge bailout in large part because there was no regulation or process to avoid them. The proposed regulations may be imperfect, but they are intended to prevent the need for bailouts and to wipe out the creditors and management of bankrupt firms, which is the opposite of a bailout. As factcheck.org explains:
No piece of legislation can guarantee that a future Congress won’t allow the federal government to prop up a failing financial institution. But claims that this bill makes taxpayer-funded bailouts a permanent fixture are misleading, to say the least.
The main point of contention is a provision that calls for a $50 billion fund to be used to liquidate a bank that’s on the verge of collapse. The bill does not authorize use of the fund to prop up companies or bail them out. Rather, it would be used to keep a troubled company operating long enough for the Federal Deposit Insurance Corporation to dismantle it. The Senate bill, which is sponsored by Democratic Sen. Chris Dodd of Connecticut, states that the fund would be available to the FDIC to be used for "the orderly liquidation of covered financial companies, payment of administrative expenses, the payment of principal and interest by the Corporation on obligations issued under paragraph (9), and the exercise of the authorities of the Corporation under this title." (The "Corporation" is the FDIC.) This fund is even called the "Orderly Liquidation Fund" in the bill.
Furthermore, while critics speak of "taxpayer-funded bailouts," the fund in question isn’t financed by ordinary taxpayers at all. The bill requires banks and financial institutions to fund it, and replenish it if funds are used. The FDIC would decide which companies have to contribute, and how much, based on an institution’s risk. The FDIC would have between five and 10 years to reach that target of $50 billion.
As for an "orderly liquidation," the bill says that would include removing the management of the company and making sure shareholders don’t get any money until other claims are paid
Williamson raises two objections to my argument. The first is that he points out that some financial firms now accept the need for regulation, which somehow shows that regulation is a "bailout bill":
You know who agrees with me on that? Goldman Sachs and Citi, both of which are backing the Dodd bill. You think Goldman Sachs — Goldman Freakin’ Sachs — is backing legislation that is bad for its bottom line or diminishes its political position? You want a side order of faerie dust with that unicorn burger?
First of all, the fact that a bank would think a bill would be good for its business is not the same thing as a bank believing that a bill would provide for bailouts. Second of all, businesses constantly "back" legislation they don't actually want to see pass. The banks opposed financial regulation at the outset. But when they saw legislation as inevitable, and their opposition doing more to hurt than help the cause of opposition, they have switched into micro-lobbying mode: Sure, we support the bill, but we wish you'd change X, Y and Z. They're suing for peace, not extracting a benefit. To interpret the fact of their negotiation as evidence that they support the overall thrust of the bill is like interpreting German negotiation with the Allies after World War I as evidence they supported the Treaty of Versailles.
My column quoted some news articles citing fierce Wall Street opposition to financial reform, and meetings in which Republicans urged Wall Street to support them and help them kill such reform. Williamson thinks this shows I'm a dupe for the lame-stream media:
Chait argues that the Democrats’ bill cannot be a big wet kiss for Wall Street because … it simply can’t. That. Cannot. Be. Is there evidence for this proposition? Chait offers a real tour-de-force of independent analysis: “A brief survey of older news stories provides a satisfactory refutation ….” Chait’s words: “brief survey of older news stories.” Chait also writes this gem: “Before Luntz’s memo, nobody had thought to question the basic fact that Wall Street considered the Democratic regulatory reform an intrusion rather than a subsidy. … It was more of an assumption universally embedded in the coverage of the events, rather than a point anybody bothered to specifically establish.” Chait should read Media Blog more often if he thinks that having a Democrat-friendly “assumption universally embedded in the coverage of the events” is an unusual development. Jeez, the New York Times and the WSJ news pages say so — assume so — it must be thus!
I suppose if you think it's likely that reporters for places like the Wall Street Journal are fabricating claims that Wall Street opposed financial regulation, or that Republicans met with Wall Street executives and promised to back their agenda, then my argument would indeed be pretty fantastical. Williamson, in an audacious pre-emptive strike, accuses me of "epistemic closure" because I actually believe the factual claims in the Times and Journal news pages.
This is kind of a brilliant move, because the natural response to his sweeping dismissal of inconvenient facts from the mainstream media is to point out that he's a engaging in a textbook case of epistemic closure, but since he called me that first it would look kind of pathetic for me to respond in kind. So instead I'll just say we disagree as to whether facts reported in mainstream media organs should generally be presumed correct.