Simon Johnson, former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”
Newt Gingrich has surged in recent polls and now has a chance to establish himself as the front-runner in the Republican presidential primaries. But as Mr. Gingrich ascends, he will need to answer a difficult question: What is his policy for Wall Street’s too-big-to-fail banks?
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This a pertinent issue for all American voters in 2012 – both for the primaries and for the general election. It speaks directly to who wins and who loses in American society and why).
It is also a question that Mr. Gingrich is likely to be asked during the Republican debate on Monday, perhaps in the context of Europe’s financial problems (the planned topics for the debate between Mr. Gingrich and Jon Huntsman are national security and foreign policy).
Mr. Gingrich’s career path creates a number of potential vulnerabilities around this issue.
No doubt Mr. Gingrich will seek to deflect the issue – as he did on Oct. 11, during a previous debate, when in response to a Wall Street-related question he said, “If you want to put people in jail, you ought to start with Barney Frank and Chris Dodd.”
This was a crowd-pleasing one-liner – Representative Frank and former Senator Dodd have their names attached to the financial reform legislation of 2011, and bashing that bill is standard Republican rhetoric.
But Mr. Gingrich will find it difficult to avoid the substance of this issue for much longer for a simple reason: Mr. Huntsman has figured out that breaking up megabanks is both sensible economics and good Republican primary politics.
Mr. Gingrich claims to be the true conservative, but the awkward – for him – truth is that on all issues related to the financial sector, Mr. Huntsman has the conservative high ground. He understands that “too big to fail” is not a market, it’s a government subsidy program, and that these subsidies are large, hidden, unfair and incredibly dangerous.
As I explained last week, Mr. Huntsman is drawing on deep thinking around these issues by some of the most serious intellectuals on the right of the American political spectrum. He is also tapping into the deep and articulate resentment in the American nonfinancial sector; people who run the businesses that generate most of the jobs in the United States fully understand that the current structure of Wall Street does not serve us well.
So it will be hard for Mr. Gingrich to respond adequately on substance. As Mr. Huntsman told Bloomberg News, speaking of other presidential candidates more broadly:
They want to be able to point out the deficiencies in front of some crowds, but they want to take money from the banking sector. They’re not going to get contributions from the banking sector if they’re specific about how they want to remedy the situation.
Mr. Gingrich was reported to be in New York this week, seeking to raise a lot of money quickly. It seems reasonable to presume that much of the available quick money is close to the heart of Wall Street.
Mr. Gingrich will also have to address the issue of whose money he took while speaker of the House in the mid- to late 1990s. This was a period in which big banks were pushing hard for the repeal of Glass-Steagall – the last remaining restrictions on what they could do and, effectively, on their scale.
Mr. Gingrich may argue that it was the Clinton administration that argued forcefully for full financial-sector deregulation, and there is some evidence that is so. But there was also a bipartisan consensus around the issue and, as far as I can ascertain, Mr. Gingrich was a central part of that.
There was an intense debate on details during Mr. Gingrich’s tenure, and a great many campaign contributions entered the fray. I have not yet seen a detailed analysis of what Mr. Gingrich received and what he oversaw – and from whom. Presumably such information will be forthcoming as his candidacy advances.
Mr. Gingrich could, of course, now turn his back on megabanks – and brand them a dangerous form of European lemon socialism (socialized losses; private gains). He did say something vaguely along these lines in 2010.
But this is not the time for vagueness or generalities. Mr. Huntsman has a specific, detailed financial overhaul program that offers the most plausible way forward for forcing the big banks to become substantially smaller and also safer. I’ve discussed this approach with leading experts, both on the right and on the left, and my assessment is that these are the most ambitious and most sensible proposals we have seen from any politician.
Mr. Gingrich has no such plan – at least not on his Web site or elsewhere in the public domain.
So, Mr. Gingrich, do you agree that too-big-to-fail banks should be broken up, as Mr. Huntsman has proposed? What are your detailed, specific proposals for how to do this? Will you endorse Mr. Huntsman’s plan?
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