If you are running for President, and you are so utterly behind in all the polls that you might as well not exist, you can do one of two things. You can take extreme, whack-job positions that will excite controversy and energize the most partisan members of your party’s base (Rick Perry’s proposal that we consider trying Federal Reserve chairman Ben Bernanke for treason), or you can take bold, sensible positions that risk alienating donors without any red-meat appeal to the true believers.
Jon Huntsman just did the latter, with a proposal that explicitly attacks two of the central elements at the core of the 2008 financial crisis – leverage and “too big to fail.”
Recall that during the financial crisis the government explicitly rejected rescuing Bear Stearns and Lehman Brothers, both of which went out of business. But after Lehman’s bankruptcy, which put insurance giant AIG in immediate danger of failure, the government had no prudent course but to step in and rescue large, greedy, careless institutions like Citigroup and AIG. These firms were quite literally “too big to fail” — had they not been rescued, they were so interconnected with other institutions that failure of one might have led to failure of all.
Since the 2008 crisis, the largest financial firms have only grown bigger. Today, the six largest U.S. financial institutions have assets worth over 66 percent of gross domestic product—at least $9.4 trillion, up from 20 percent of GDP in the 1990s. The Fed’s cheap-and-easy-money policy since the fall of 2008 is in effect a constant subsidy for the financial sector, and by the nature of the economics of that sector, a subsidy that benefits the biggest the most.
Huntsman would explicitly attack the too-big-to-fail problem both by a permanent tax on institutions large enough to create systemic risk, and also by limiting the leverage those institutions could employ. Both changes would explicitly reduce the profitability of the largest banking enterprises.
Huntsman is one of the first to step outside the narratives of the two political parties. The Democrats’ narrative is that the financial crisis was a failure of market capitalism, caused by the deregulation policies of the Bush administration, and easily fixed by the imposition of new regulations. The Republicans’ narrative is that the crisis was produced by government interference in the free markets, through the implicit government guarantee provided to Fannie Mae and Freddie Mac, as well as the Community Reinvestment Act’s mandate of affordable housing.
Both narratives are fundamentally incomplete. The reality is that we suffered a failure not of capitalism, red in tooth and claw, nor of government, captured by special interests and intrinsically inept, but a failure at the hinge between the two; what we suffered was a failure of the modern mixed-economy model, and no policy that is based on either party’s incomplete narrative can prevent another such catastrophe in the future.
By stepping beyond the partisan rhetoric, Huntsman shows us a way forward. We’ll see if his plan begins to attract attention within his own party. In an election cycle that has seen a former pizza executive briefly lead the polls, and a successful Texas governor with a huge campaign war chest fall from contention, stranger things have happened.