Yesterday we made the case that the “too big to fail” argument being made in favor of a government bailout of Citi—should it come to that—ran contrary to the idea behind the deregulation of the banking industry over the last dozen years. Basically, the argument for deregulation was that market processes would better determine the size and scope of banking and investment houses and financial innovation better than political and regulatory fiats. A bailout would undermine those market processes by privatizing the rewards of untrammeled growth while politicizing the risks. Offering a government insurance policy against the failure of our super-sized financial institutions is no better than the regulatory scheme that proceeded it. Indeed, it may be worse.
We were a bit jarred to see a similar argument being made in the pages of The Nation, not normally a periodical known for its enthusiasm for market processes. While The Nation drew the opposite conclusion we do—favoring a return to regulation over resistance to bailout—it at least understood half the equation: that deregulation of the upside and government insurance against the downside is a scam.
Fortunately, this wisdom is not confined to the pages of The Nation. (Or, rather, its website; we haven’t actually seen a copy of the dead tree version of The Nation since our college years.) This morning’s Wall Street Journal’s editorial page runs a piece making precisely the right argument.
The phrase "too big to fail" is already being bandied about regarding Citigroup, and we can expect to hear more of it in the weeks to come.
But failure can take many forms. Citigroup is not about to disappear from the face of the earth, taking its assets and liabilities and leaving counterparties empty-handed. An orderly process that imposes market discipline and involves genuine price discovery would be far preferable to one in which a bank that has stumbled this badly is propped up by government regulators.
Deregulation allowed banks to take on bigger risks, along with meeting higher capital standards. Putting those risks on taxpayers' backs would combine the worst features of a highly regulated system with the private profits that in good times came from expansion and consolidation. If it comes to putting new capital into Citigroup, the bank's current equity holders need to bear most of the pain.
[Editor's note: Brian M. Carney, the brother of Dealbreaker's John Carney, serves on the editorial board of the Wall Street Journal.]
Ex-Prince of the Citi [Wall Street Journal]