Over the weekend Republican senators John McCain and Richard C. Shelby made headlines when they advocated that the government should let some big banks fail.
Close them down, get them out of business,” Mr. Shelby, the senior Republican on the Banking Committee, told ABC’s “This Week With George Stephanopoulos.” “If they’re dead, they ought to be buried.”
I’m not really sure what the economic reasoning is in that statement. Kind of sounds like knee jerk “jackassery” if you ask me. Or as Kevin Drum calls it the “fuck it” strategy:
Allowing Citi to fail would hardly cause them any more damage than they’ve already suffered. So why not just let them go under, as Shelby wants?
The answer is that we could do this. This was the gamble Ben Bernanke and Henry Paulson took last September when they allowed Lehman Brothers to fail — dammit, it’s time to enforce some market discipline on these guys! — and their gamble failed spectacularly. The global financial system nearly collapsed even though Lehman wasn’t all that big.
But hey — maybe Lehman taught everyone a lesson. Maybe all of Citgroup’s creditors and counterparties have already priced in the possibility of default. You never know. And maybe if Citigroup fails, and they all end up with a bunch of worthless notes, they’ll just shrug and go about their business.
Then again, maybe not. Maybe Citigroup really is too big to fail. And maybe if they fail, and all their creditors and noteholders and counterparties are stiffed, maybe they’ll all fail too. And then all of their creditors and noteholders and counterparties will also fail. Etc. And then it’s back to the dark ages for all of us.
Which is it? I don’t know. All I can say is: Richard Shelby has way bigger balls than I do. Call me a wuss if you must, but I’m really not willing to gamble on nuclear meltdown, especially since I think the odds are pretty strongly in favor of Citigroup having the ability to take all the rest of us down with them if they collapse. Shelby, however, the ranking Republican member of the Senate Banking Committee, guardian of the nation’s financial health, is apparently willing to just say “fuck it,” roll the dice, and hope against hope for snake eyes.
Of course, this is precisely the kind of imbecilic, high-stakes gambling that got us into this mess in the first place. Maybe Shelby ought to think twice before deciding that the hair of the dog might get us out.
Count me down in the Kevin Drum column for now.