Viva Cantor-Krugman? House GOP Backs Receivership For Insolvent Banks

March 26, 2009 9:49 am

There were few details in today’s outline of the House Republican budget alternative — but on the thorny question of future bank bailouts, the GOP had a clear plan. And it looks a lot like Paul Krugman’s preferred method.

TPMDC noted the first stirrings of the GOP’s Krugman love earlier this week, when House Minority Whip Eric Cantor (R-VA) joined the liberal economist in lamenting the taxpayer subsidy built into the Obama Treasury’s latest bank rescue plan. But today’s Republican budget alternative goes even further, directly repeating Krugman’s past criticism of the Treasury’s bailout ethose:

In sum, the message with bailouts of this magnitude is that your profits will be private but your losses socialized.

Now, House Republicans go on to extrapolate a future of socialized losses as well as profits — a prediction one suspects Krugman would reject. And then they go right back to Krugman-ville with this proposal:

[O]ur plan supports a process to address insolvent institutions that stops throwing good money after bad into failing institutions and places insolvent ones into temporary receivership. … For insolvent firms, either the FDIC or a Resolution Trust Corporation-type entity would restructure these firms in receivership by selling off their assets and liabilities, reappointing private management, while protecting depositors — a process that builds off Washington Mutual’s arranged sale last year.

Here’s how Krugman suggested combating the financial crisis back in January:

A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: It seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, Resolution Trust Corp.; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.

When I asked House Minority Leader John Boehner (R-OH) directly about his alternative budget’s embrace of more direct government involvement in the winding down of insolvent banks (using the word “liberal”), he affirmed that a receivership scenario “not unlike what happened under [the Resolution Trust Corporation] would be a better way to resolve” the unanswered questions of banks’ financial health.

It’s one thing for the party of smaller government to embrace more government involvement in insolvent banks than the Obama administration … but this also raises the question of whether Republicans would consider forcing a House vote on creating a new version of the Resolution Trust entity. It would be illuminating to see how many Democrats would be in their corner.

Late Update: A reader writes in to make a very good point about this Carroll-esque turn in the Republicans’ bailout stance:

[This] is actually great news for the Democrats. As Krugman has stated, his greatest fear is that the Geithner plan will not work and that by the time that becomes clear the Obama Administration will have squandered the political capital it would need to advance the bankruptcy-capital injection plan. With the GOP now adopting Krugman’s line, there’s no need to fear the absence of political capital since the GOP is binding itself publicly to the strategy. This is a win-win for the Obama Administration and the American people.

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