Bail-Out Fatigue Has Set In

I testified this morning before the Senate Banking Committee’s hearing on “Establishing a Framework for Systemic Risk Regulation,” along with my AEI colleague Allan Meltzer. Observing the exercise of democracy up close and personal is always interesting, and this exercise was especially relevant because the White House only just put forward specific legislation. The administration wants to create a regulatory oversight council and give the Federal Reserve special powers to deal with institutions that pose significant risk.

Three observations stand out. First, the senators were almost universally underwhelmed by the specific legislation proposal from the administration, highlighted by a mistrust of giving the Fed new powers. There were general concerns about vesting too much authority in one entity and about the Fed’s performance in particular.

Second, bail-out fatigue has set in. The senators appeared frustrated that more financial institutions were too big to fail. Over the past year, the determination that more institutions were too big to fail involved the commitment of significant government resources. It has also enmeshed politicians in a debate on intricate issues such as executive cooperation and the governance role of boards of directors.

Third, elected officials appeared almost extremely unaware of their own role in the financial crisis. Only at the 2½ hour point did Senator Mel Martinez mention the government sponsored enterprises, Fannie Mae and Freddie Mac. This was jarring on a morning in which a report appeared that the aid to Fannie and Freddie could top $200 billion. Nor was there much recognition that the complexities of the regulatory structure, tax code, and accounting rules made supervision much more difficult and blunted market discipline. I addressed this issue in my testimony, which will be posted to my AEI page.

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