“I have cautioned our caucus from hyperbole,” Republican Senator Bob Corker told TIME last April. “It’s an intellectual lift to work your way through [financial reform]… Unfortunately it gets debated in pretty broad statements.”
He was commenting on, though not outright rejecting, Republicans’ charge that the “resolution authority” element of the Dodd-Frank financial regulatory reform bill would lead to “bailouts in perpetuity.”
When reading over Paul Ryan’s new budget package to see what he said about financial sector regulations, I had a bit of a flashback.
“This budget would end the regime now enshrined into law that paves the way for future bailouts,” Ryan wrote, referring to the Federal Deposit Insurance Corp.’s power under Dodd-Frank to seize and liquidate failing megabanks.
Dodd-Frank polls pretty well, especially when it goes by the somewhat inaccurate moniker “Wall Street Reform,” and Republicans, despite largely favoring repeal, have not mounted the same pitchforks-and-torches publicity campaign against it as they have against health reform. The text of Ryan’s plan is somewhat vague, but I was able to confirm that it does not propose whole-cloth repeal of Dodd-Frank. Rather, it directly targets only one element of the law:
While the authors of Dodd-Frank went to great lengths to denounce bailouts, this law only sustains them. The Federal Deposit Insurance Corporation (FDIC) now has the authority to access taxpayer dollars in order to bail out the creditors of large, “systemically signiﬁcant” ﬁnancial institutions. CBO’s expected cost for this new authority is $26 billion, although CBO Director Douglas Elmendorf recently testiﬁed that “the cost of the program will depend on future economic and ﬁnancial events that are inherently unpredictable.” In other words, another large-scale ﬁnancial crisis in which creditors are guaranteed to get government bailouts would cost taxpayers much, much more.
This is misleading. Under Dodd-Frank, FDIC can borrow money from Treasury to cover overhead costs that keep a firm open while its assets are liquidated and its board wiped out. Proceeds from asset sales go to pay Treasury back before shareholders see a dime, and the government can levy fees on the financial sector writ large to recoup losses not covered by the liquidation process.
But the putative goal of Ryan’s “Path” is to reduce long term deficits. So it’s worth examining how much money is saved in the area of financial regulation.
According to the Congressional Budget Office (.pdf), the resolution authority would require $26.3 billion over ten years to establish the Orderly Liquidation Fund, and take in $6 billion in revenues between 2010–2020, resulting in a net cost of $20.3 billion. It’s the most expensive part of the law, but a drop in the pond of a decade’s worth of government spending. CBO projects Dodd-Frank as whole would reduce the deficit by $3.2 billion over that same period.
Ryan’s plan would also freeze the budgets of the SEC and CFTC, the only financial regulatory agency subject to congressional appropriations, at 2008 levels for five years. Their combined yearly budgets amount to $1.27 billion. Bringing them back to 2008 levels would make it difficult, if not impossible, for those agencies to carry out new mandates under Dodd-Frank, and that five-year freeze, based on some rough back-of-the-envelope math, would save in the neighborhood of $1 billion.
Some would argue that every part of government needs to take a haircut in times like these. The SEC and CFTC aren’t singled out in Ryan’s plan, but would take a hit under the broader umbrella of non-defense discretionary spending. Still, there aren’t hugely significant savings to be found in the regulatory regime overall, and Ryan’s “Path,” which some are billing as laudably apolitical, relies on old partisan arguments in its targeting of Dodd-Frank’s resolution authority.