The New York Times reports today that the Republican presidential candidates have decided to make their opposition to the Dodd-Frank financial-reform act a centerpiece of their campaigns. They complain about the effect of “regulatory uncertainty” on the economy, though it’s clear that the part of “regulatory uncertainty” that bothers them is not the uncertainty but the regulation. Three-quarters of the hundreds of regulations the act authorizes haven’t even been written yet. Obviously, the sooner they’re written and enforced, the less uncertainty there will be. So if “regulatory uncertainty” were the Republicans’ real concern, they would quickly get behind efforts to implement the act, which is designed to protect consumers from unscrupulous lending practices and taxpayers from more bailouts. Instead, of course, Republicans on Capitol Hill have been stalling, starving, and sabotaging the agencies charged with working out the details of the Dodd-Frank Act.
This controversy is not about uncertainty at all, but about risk, and who has to bear it. If taxpayers are going to be expected to bail out financial institutions that are too big to fail, then their elected representatives ought to do everything possible to make failure less likely, even if that also makes the institutions less profitable to their shareholders. The big banks obviously don’t like this. They would prefer that the government continue to let them take whatever risks they like — and continue to rescue them whenever their high-risk activities bring them to grief. The Republican presidential candidates, as well as the GOP congressional caucus, appear to believe that whatever keeps profits down on Wall Street is bad for Wall Street, and that whatever is bad for Wall Street is worse for the American economy. This commutative property of their discredited economic theory allows them to defend Wall Street’s interests without ever having to mention Wall Street itself: you will hear them warning that the financial-reform act will cost us jobs, not that it will make investment banking less lucrative (which it probably will, and probably should).
None of the Republican candidates dares to deny that the Dodd-Frank Act will make the financial industry safer, but there is some (mostly tacit) disagreement among them about what to do when the underregulated financial industry they wish to preserve explodes again as it did in 2008. Some of the candidates — call them the honorable fantasists — have been steadfastly opposed to bailouts: if the bankers run aground again, let them all drown; that’s capitalism. This position is honorable because it’s consistent. It’s fantasy because it fails to acknowledge a basic fact about modern economies like ours: what economists call “externalities.” If investment bankers and hedge-fund managers were the only ones who suffered from their recklessness, then it might makes sense to say, with Ron Paul and Michele Bachmann, that the government should just leave Wall Street alone, to get rich or go broke trying. But of course this is not what really happens. What happens is what happened just a couple of years ago — and what is still happening now, as the economy struggles to make up for all the jobs lost after the financial crisis. When the whole financial industry screws up, everyone suffers. Innocence offers no protection when microeconomic imperatives cause a macroeconomic meltdown. This is why it makes sense for an institution designed to protect everyone’s interests — namely, the federal government — to force Wall Street to account for Main Street externalities, and that means more rigorous regulation.
What about the Republican candidates who aren’t fantasists? Well, they’re also not honorable. The Mitt Romneys of the world want to have it both ways: minimal regulation but also maximal insurance for financiers, to be paid for by taxpayers. Romney supported TARP; he will no doubt support the next TARP, too. And let there be no doubt: the time will come for another TARP if the Republicans succeed in scuttling the Dodd-Frank Act. Mitt Romney represents the interests of those who, as the Irishman put it, know which side their bread is buttered on: both f**king sides.