Policy Brief

The Future of Too Big to Fail and Bailouts

A comparison of the two plans to overhaul financial services regulation in the 21st Century
Policy Brief 81

The role regulation played in the creation and evolution of the recession and financial crisis is a very hot topic. Undoubtedly, regulators helped create the mess, though how and to what degree remains undecided. But everyone agrees that some changes need to be made to the financial sector’s regulatory structure.

President Barack Obama unveiled his proposal to fix Wall Street regulation on June 17, 2009. If enacted, the plan-written with the help of Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner-would be the biggest expansion of federal regulation of the financial sector since the Great Depression. The proposal dramatically increases the authority and scope of the Federal Reserve, while also creating a system that codifies the concept of “too big to fail.” That part of the plan would ensure plenty of future bailouts. Still, President Obama’s plan does go a long way toward consolidating complicated layers of oversight in the banking and insurance industries.

Congressional Republicans offered a counter plan on July 23, 2009. Their alternate proposal includes several similar provisions, including establishing a board to oversee systemic risk, reducing Federal Reserve independence, and consolidating banking regulation. The GOP’s plan overreaches in bank regulation reform, takes a weak position against government-sponsored enterprises, ignores federal insurance reform completely, and unfortunately expands the role of the Securities and Exchange Commission (SEC). However, the Republicans focused chiefly on ending the policy of “too big to fail” and, despite supporting bailouts under President George W. Bush, are now opposed to future bailouts.

Unfortunately, neither plan is perfect. We know Congress is going to pass a bill overhauling financial services regulation. Given that some reform is going to happen, and is probably necessary, there are aspects of each plan that can be mixed and matched to prevent the government from expanding its reach into every corner of the financial market and instead simplify regulations to ensure taxpayer money does not wind up supporting failing financial institutions in the future. To that end, we have provided a condensed comparison of the two plans, what they propose, and what should be done.