Thursday, August 23, 2012

Romney Edges Toward Banking Reform

James Pethokoukis, Erick Erickson, and others have pondered the electoral and policy benefits of Mitt Romney's campaign taking up banking reform.  Well, now it seems as though Romney is ready to address this issue, if this interview with Time is any evidence (emphasis added):
STENGEL: Another sort of related business question, if you look at the regulatory environment for the banks now and there are basically five big banks that in terms of assets disproportionately outweigh everybody else, is there a situation of moral hazard now related to those banks? And what would you do to reform the financial sector? Would you bring something back like Glass-Steagall? How do you see it, Governor?
ROMNEY: I think Dodd-Frank has contributed to a concentration of banking assets into the hands of a small number of banks. By designating certain banks as being too big to fail, strategically important banks, it makes it more difficult for the banks not so designated to attract customers and to expand their business. What you’ve seen as a result is a concentration in the hands of a handful of banks that now has greater systemic threat that what even existed before.
The right course was not to say that this handful of banks will be protected by the government, implying therefore that all the rest of the banks are on their own, because smart depositors will all move towards the banks that are protected by government. It had the opposite effect of what was advertised. What was advertised was that we would keep the too big to fail banks from getting bigger, but the result of the legislation is just the opposite.
What we need to do is to make it easier for the community and local banks and regional banks to succeed and thrive because they, after all, are the places where small and medium-size businesses get their funding. So the whole idea of designating a handful of banks as the government-protected too big to fail banks is the wrong course.
Now, we do need to have regulation in the banking industry. Extensive regulation is appropriate in an industry that has such an impact on the overall economy. We have to look at what the causes were of the last crisis and take action to prevent those causes from reappearing. What kinds of things come to mind include capital requirements, levels of leverage which are appropriate and inappropriate, banks maintaining risk in assets which they gather. Specifically, I’m referring to the idea if a bank originates a loan or a mortgage that it should be on the hook for some portion of the loss if that loan or mortgage fails. These kinds of provisions, I think, would be directly applicable to the kind of crisis that we experienced before.
Interestingly in these comments, Romney emphasizes the critique put forward by the Dallas Fed, and echoed by many on the right and center (and some on the left), that Dodd-Frank made Too-Big-to-Fail worse---not better.

Taking on banking reform could be helpful for Romney for at least two reasons: it could sketch out regulatory foundations to help prevent a financial collapse in the future, and it would also shift the territory of the campaign.  By embracing banking reform, Romney could disrupt the leftist narrative that he and other Republicans are merely tools of financier-plutocrats.  Americans still are hurting from the financial crisis, and and many still have a lingering fear that the causes of this collapse have not been fully addressed.  Financial reform could give Romney a way of assuaging to the fears of many Americans, particularly those in the economic middle and those suspicious of both parties.

There's a conservative case to be made for financial reform, and Romney may be heading in the direction of making it.