- The Washington Times - Saturday, April 17, 2010

Senate Banking Committee Chairman Christopher J. Dodd accuses Republicans of lying when they warn that the banking regulation bill will allow government bailouts of Wall Street. “It’s just a Wall Street lie,” the Connecticut Democrat said on Wednesday. “This bill ends bailouts.” The senator doth protest too much. The problem with Mr. Dodd’s accusation is that the bill puts aside a $50 billion fund for bailouts.

There has been a lot of smarmy favoritism in doling out bailout money during this economic crisis. Goldman Sachs received tens of billions of dollars while Lehman Brothers - Goldman’s biggest competitor - was forced into bankruptcy because it didn’t get a handout. Claims of “too big to fail” cannot explain why one major company was subsidized and the other wasn’t.

It’s counterproductive for government bureaucrats to pick corporate winners and losers. Hundreds of economists at major universities signed an open letter last year warning that bailouts did more harm than help for the financial system. The bankruptcy system works, and bankruptcy doesn’t shut down or destroy all operations, as many skeptics believe. Some parts of a troubled company might be sold off, but divisions that can run profitably routinely continue as well or better than before after being shorn of dead weight.

The banking bill’s bailout fund creates moral hazard because known subsidies for possible future bailouts encourage companies to take greater risks. There’s less pressure to be responsible when firms get to keep their profits but taxpayers have to pick up their losses.

Democrats argue that future needs for bailouts will be limited because Washington will prevent companies from getting “too big.” Such interventionism ignores the fact that the market determines why some companies are large. Size often reflects a firm’s ability to provide services its competitors can’t. Some grow large because they offer products at a lower cost. In either case, laws that regulate corporate size can undermine business competitiveness by destroying efficiencies that come with the ability to spread costs across bigger operations.

Current congressional attempts at reform will only further damage the banking system.

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