McCain Economic Adviser: Let Insolvent Banks Fail

04/24/2009 05:12 am ET | Updated May 25, 2011
  • Sam Stein Senior Politics Editor, The Huffington Post

Sen. John McCain's chief economist during the campaign is sounding a tune on the financial crisis that endears him to some of the progressives he once irritated.

Appearing on NPR Tuesday morning, Douglas Holtz-Eakin argued (in contrast to Obama's bank plan) that insolvent institutions should be allowed to fail, and taxpayer money should be geared towards managing the fallout of those failures.

"To really get financial stability, we have to acknowledge that some of these institutions have failed, for example AIG has failed, and move past simply keeping them upright -- and pumping money in to do it -- to winding them down in an orderly fashion, selling down their assets to new institutions that have a chance to make a profit in the future. That's the only way we will effectively clean out the bad assets in the system," said Holtz-Eakin. "You certainly don't want to repeat the Lehman Brothers experience where you simply let them go to bankruptcy and fail over night. You want to sell off their assets in an orderly fashion. And as you do it you do have to have taxpayer money in there to make sure the creditors aren't damaged and you don't get a lot of collateral fallout in the economy. We shouldn't be keeping failed institutions alive. We should be insulating others from the consequences of their failure."

The remarks put Holtz-Eakin at odds with the White House in ways that may be surprising -- the Republican voice appearing less sympathetic to the desires of Wall Street. The plan for a public-private partnership to clean up the banks, as announced by the Treasury Department on Monday, underscores the president's commitment to not let any major financial institutions fail. It is also another in a series of investments of public money (in this case, in the form of loans and guarantees that would supplement private investors) designed to purge toxic assets from the banking system. Treasury Secretary Timothy Geithner has noted that, if the government were to take over banks completely, it would put the taxpayer on the hook for even more liabilities. But Holtz-Eakin, as others have before him, seems to be arguing that more could be done with less.

The former McCain and George W. Bush adviser also had some sharp words for Congress over its reaction to the bonuses issued by insurance giant AIG. Calling efforts to heavily tax these bonuses "appalling," he argued that there were far-reaching economic implications to this surge of populist outrage.

"The notion that they will now get the private sector capitol to come in and help restore financial stability, when they change the rules every day and attack the people they are trying to get help, it's just not going to happen," he said.

Conservative economist have expressed similar views. But McCain himself has been non-committal.

"If we hadn't bailed them out, then they would have gone bankrupt, and all of this stuff would have been the subject of the courts and reorganization," the Senator recently told Fox News. "Instead we poured hundreds and how many billions dollars into this failing institution, and now we have everybody scrambling around. It is incredible that the Treasury Secretary knew about these bonuses and didn't tell anybody or certainly Congress was not informed."