The Goldman Sachs circus currently playing Washington certainly is energizing. And it’s a relief to see some life in the legislative process looking to financial reform. But the policy posturing is starting to get to me. Are you, like me, tired of all the claptrap? For a restorative, take out Jeffrey N. Gordon and Christopher Muller, Avoiding Eight-Alarm Fires in the Political Economy of Systemic Risk Management.
Gordon and Muller offer a learned, yet quite readable review of the financial crisis. I particularly recommend their treatment of the role played by credit default swaps and their recounting of the steps that ended in the TARP and the role played by Federal Reserve Act section 13(3) in the sequence of events. The authors know their economics, but in this paper the legal perspective dominates to the reader’s great benefit. There is also a clear-eyed and reasonable analysis of the policy choices. Here Gordon and Muller clear up much of the murkiness that surrounds discussions of “resolution authority.” That accomplished, they suggest that we get used to the prospect of future bailouts. Where a $50 billion fund raises hackles on the Hill, they think $1 trillion is more like it.
If, after reading and assimilating Gordon and Muller, you are ready for something a little more over-the-top, pick up my Georgetown colleague Adam Levitin’s In Defense of Bailouts. Levitin is on the same page as Gordon and Muller and sees bailouts in the cards of whatever future hand we deal ourselves. He makes a stand up case for them on distributive grounds, also showing us where we can expect regulation to succeed and where its likely to come up short. The best stuff is at the end of the paper, where Levitin suggests how to structure bailouts better. Their incidental beneficiaries (read Goldman) should be made to give back once the crisis passes, either through recoupment taxes or returns to the government on force-placed investments.
I’m still worried about the Senate bill. But papers like these somehow make me feel better about it all.