Congress is considering an extremely dangerous idea almost nobody has heard of
By Lawrence H. Summers January 18 at 7:00 AM
Inevitably, Congress has more attractive uses for new funds than it has sources of new funds, so there is always is a desperate search for “pay-fors” — measures that are scored by the Congressional Budget Office as raising revenue or reducing outlays and so can be used to finance new initiatives. The pressure is particularly acute this year with the ambitious plans of the new administration. There is also the likelihood that the use of the budget reconciliation procedure will preclude careful deliberation of proposed pay-fors.
I recently learned of a particularly dangerous pay-for that may have superficial appeal —the repeal of Orderly Liquidation Authority (OLA). This repeal, if enacted, will exacerbate moral hazard, impair financial stability, increase economic vulnerability and in all likelihood increase the national debt. It would be a major unforced error.
OLA is a new bankruptcy-type provision included in Dodd-Frank financial reform legislation that gives the Federal Deposit Insurance Corp. the authority to resolve insolvent systemic financial institutions (think future Lehman-like episodes). It allows the FDIC to borrow funds from the Treasury to support the liquidation of such firms with the proviso that in the event of any losses, fees will be levied on bank holding companies and other financial institutions to fully reimburse the Treasury. This authority is a wholly rational response to the gaping hole in our financial architecture evinced by the catastrophic Lehman failure, where policymakers' only alternatives were uncontrolled bankruptcy or taxpayer-financed bailout. Had it been in place in 2008, much carnage could have been avoided. So, much is wrong with eliminating OLA in order to get about $20 billion in CBO-blessed revenue.
First, the claim that repeal of OLA will improve the federal budget is bogus. As just noted, it ignores entirely the possible exacerbation of a future economic downturn. Moreover, it does not take proper account of the fact that the law requires that Treasury be reimbursed in full for any losses. The apparent cost occurs only because CBO measures budget impacts within a 10-year window and if, for example, a liquidation takes place in year nine, then the reimbursement will take place outside of the 10-year window. In the economically relevant present value sense OLA by construction has no budget cost.
Read more: https://www.washingtonpost.com/news/wonk/wp/2017/01/18/congress-is-considering-an-extremely-dangerous-idea-almost-nobody-has-heard-of/?utm_term=.23088e52faf5
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