Summers: Troubled firms should be allowed to fail
WASHINGTON — President Barack Obama’s top economic adviser on Friday pressed for new restrictions on the biggest and most intertwined financial institutions and said the industry should not count on government to rescue them from crisis again.
“Our financial system will not be fail-safe until it is safe for failure,” said Lawrence Summers, the director of Obama’s National Economic Council.
Summers especially called on Congress to pass new requirements that would force large, super-leveraged institutions to have bigger cushions of capital to protect them if their risky transactions fail.
His remarks came just days before leaders of the top 20 economies meet in Pittsburgh where their responses to the crisis that brought financial systems to the brink last year will dominate discussions.
Summers decried the options the federal government faced last fall with Lehman Brothers and insurance giant American International Group. Lehman was allowed to succumb in bankruptcy, creating a panic across the system. AIG was bailed out with billions in government rescue funds out of fear that its demise would cause a cataclysmic chain of events.
“What is beyond debate is the unsatisfactory character of those choices,” he said, in a speech Friday at Georgetown University’s McDonough School of Business. “It is wrong that taxpayers, thousand of miles from Wall Street, should be at risk because our system gives authorities no choice but to commit taxpayer money or to accept collapse and chaos.”
One year after the financial system teetered on the verge of collapse, the Obama administration and Congress have moved financial regulation to the front burner, behind health care but ahead of energy and climate change legislation. House and Senate committees are working on legislation and key lawmakers say they intend to have legislation for Obama’s signature as early as year’s end.
In his speech, Summers devoted more time calling for protections against firms deemed “too big to fail,” than he did promoting the administration’s other top recommendations: creating a consumer finance protection agency.
That proposal has met resistance in Congress, even among Democrats, and has faced vocal opposition from community banks and the U.S. Chamber of Commerce.
Summers said some advertising that negatively targets the consumer protection agency has mischaracterized the proposal as interfering with retailers’ ability to provide credit to customers.
“That argument is to the financial regulation debate what the ‘death panel’ argument is to the health insurance debate,” he said, in a reference to discredited claims about proposed health care measures.
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