Economics, Financial Services

Jon Huntsman declares war on big banks and Too Big To Fail

With a brand new proposal, Republican presidential candidate Jon Huntsman is the only GOP 2012er to have moved beyond “repeal Dodd Frank” (which sounds like a return to the status quo) and fashioned a serious and comprehensive — and bold — financial reform plan. He’s for repealing Dodd Frank, of course, but also a) reducing bank leverage by axing the deduction for interest payments and b) shutting down Fannie and Freddie.

But eliminating “too big to fail” is really the core of what he’s trying to do. As Team Huntsman correctly notes, the six largest U.S. financial institutions are significantly bigger than they were before the financial crisis. These banks now have assets worth over 66 percent of gross domestic product—at least $9.4 trillion, up from 20 percent of GDP in the 1990s. And the major banks’ too-big-to-fail status gives them a huge advantage in bor­rowing over their competitors. This funding subsidy amounts to at least 25 basis points and perhaps as much as 50 basis points. Indeed, that edge is proof TBTF still exists.

We need banks that are small and simple enough to fail, not financial public utilities. Hedge funds and private equity funds go out of business all the time when they make big mistakes, to the notice of few, because they are not too big to fail. There is no reason why banks cannot live with the same reality.

Here’s how Huntsman wants to kill TBTF and break the crisis-bailout-crisis-bailout cycle:

 1. Set a hard cap on bank size based on assets as a percentage of GDP. (This cap would be on total bank size, not using any of the illusory “risk-weights” currently central to thinking about bank accounting. The lowest risk assets for banks in Europe, supposedly, are sovereign debt—yet this very same debt is now at the heart of the current crisis.

2. We should have a similar cap on leverage—total borrowing—by any individual bank, relative to GDP.

3. Explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy.

4. Impose a fee on banks whose size exceeds a certain percentage of GDP to cover the cost they would impose on taxpayers in a bailout, thus eliminating the implicit subsidy of their too-big-to-fail status. The fee would incentivize the major banks to slim themselves down; failure to do so would result in increasing the fee until the banks are systemically safe. Any fees collected would be used to reduce taxes for the broader non-financial corporate sector.

5. In addition, focus on establishing an FDIC insurance premium that better reflects the riskiness of banks’ portfolios. This would provide an incentive for banks to scale down, allowing the financial system to absorb them organically in the event of a collapse.

6. Strengthen capital requirements, moving far beyond what is envisaged in the current Basel Accord. The Accord is a mixture of regulatory oversight and political compromise. As a result, the U.S. has allowed its banking policy to be determined by the “least common denominator” among European and Asian countries, many with a long history of not being prudent.

About the only things not in there are a) a Tobin tax on trading, b) reinstating of Glass Steagall and c) what to do if banks still get in trouble (debt-equity swaps, good bank/bad bank). The stuff on capital requirements is great, and using a bank tax to cut taxes on non-bank firms is quite interesting. (It also avoids the creation of a bailout slush fund that Congress could raid.) Reforming the financial system is low-hanging fruit that Republicans have been reluctant to pick. Huntsman just did.

52 thoughts on “Jon Huntsman declares war on big banks and Too Big To Fail

  1. If the Republicans are smart, they would ditch Romney (assuming they’re not foolish enough to nominate Bachman, Perry, Cain, Gingrich, or Paul), and nominate Huntsman. He’s the only guy who has a chance at beating Obama. He’ll attract independents and maybe pick up A lot of the progressives who are disappointed with President Obama.

    • I agree with Mark. We should give Huntsman serious consideration. The usual critiques of him fall flat when he’s compared to other candidates with better polling who have now imploded, or who have crippling baggage, or who may well not be conservative at all. Hunstman’s not perfect but he has a solid record & broad experience, he has the “temperment” to be president, and he could beat Obama. I get why obnoxious Santorum is on the bottom, I can’t understand why Huntsman still is.

  2. I agree withe comments that ask why anyone would care what Huntsman thinks.

    Moreover, statements like “Any fees collected would be used to reduce taxes for the broader non-financial corporate sector.” are obvious nonsense.

  3. This article is filth. You can not look at me with a straight face and tell me that Huntsman is “the only GOP 2012er to have moved beyond ‘repeal Dodd Frank’”. Are we forgetting a certain someone who’s actually polling in the middle of the pack?

    Ron Paul makes reforming the financial system the center of each debate, even when it’s not supposed to be! He is a man well-immersed in the Austrian school of Economics, which teaches that you can’t jumpstart an economy by throwing money at it with bailouts, and that NOTHING is too mig to fail! Ron Paul has said from the very beginning that the government’s role is not in the financial sector! Banks, automakers, mortgage lenders, etc. will rise and fall in accordance to the decisions they make! It’s the natural, healthy course of economics! Time to stop rewarding failure by electing someone with a STRONG, CONSISTENT stance on ending corporate welfare!

    Come talk to me when you’ve educated yourselves on the FACTS.

    • The Austrian School is made of the biggest band of charlatans the 20th century has ever had the misfortune to birth. Excepting the fascists and the Marxists, of course.

    • Ron Paul have allowed the banks to fail. In theory this sounds fine, but when it would destroy the whole economy totally it doesnt sound as great. What should have been done was bail them out and then implement what Huntsman lays out here. Once they are made smaller then they can operate however they wish and if they fail they fail.

      Ron Paul wouldve allowed the entire economy of this country and by extension the world to collapse. You might see this as stick by his principles, I see it as suicidal just to prove a point.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>