THE BLOG
06/19/2010 05:12 am ET | Updated May 25, 2011

Mitch McConnell Gets it Wrong

CANDY CROWLEY (CNN, Sunday): The president says you are being deceptive in describing this bill.

MCCONNELL: Well, Candy ... there is a bailout fund in the bill that was reported out of the Banking Committee, the partisan bill that came out of committee on a party-line vote.

CROWLEY: But that still does not--

MCCONNELL: I don't think that's in dispute.

CROWLEY: But that bailout is funded by the banks themselves, is it not? It is not a taxpayer bailout?

MCCONNELL: Well, Robert Reich, who was Bill Clinton's secretary of labor, says it is a bailout fund.

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When Mitch McConnell has to misquote me to find evidence he's telling the truth, he is desperate.

No, Senator, I never said Dodd's finance reform bill contains a bailout fund. The fund in the Dodd bill is a $50 billion liquidation fund designed to keep the creditors of distressed banks from jumping ship so fast they'd cause widespread financial panic before the bank's operations could be wound down. And the cost of that liquidation fund would be paid entirely by Wall Street's biggest banks. So it's not, I repeat not, a bailout fund.

I did write in one of my recent posts that the bill "preserves the possibility that the Fed could launch another bank bailout." That has nothing to do with the liquidation fund. It concerns a different provision of the Dodd bill that gives the Federal Reserve Board authority to open its discount window to healthy banks under its purview in order to protect taxpayers from loss during a major destabilizing event, like the popping of another large speculative bubble. Giving the Fed this authority is an open invitation to the biggest banks to create a destabilizing event in the first place, which is what Wall Street's giants did the last time when they created the giant speculative bubble in home mortgages and related derivatives. That's why I believe it essential to limit the size of all banks - so that none has the market power, alone or in league with the others, to create a massive destabilizing event that will surely require the Fed to bail them out.

The Dodd bill strengthens the biggest Wall Street banks relative to smaller banks, and sets them up to become even bigger. As long as the Fed can open its discount window only to the biggest Wall Street banks, their borrowing costs inevitably will be lower than those of smaller firms because their debt will be safer. (This, incidentally, is also a problem posed by the liquidation fund.) So at a time when we ought to be ought to be trimming the sails of the giants on Wall Street, the Dodd bill puts more wind in them.

Cross-posted from RobertReich.org