Guarantor of Last Resort

Abstract

Larry Summers, who was one of President Obama’s key economic advisors when the Dodd-Frank Act of 2010 was enacted, what he called “excessive populism” in portions of that legislation. This might seem surprising; Dodd-Frank’s technocracyon-steroids approach (848 pages! 390 separate !) might seem like the antithesis of bust-up-the-banks populism. “My administration is the only thing between you and the pitchforks,” President Obama once the nation’s leading bankers.

But Summers was referring to several specific Dodd-Frank provisions that curtailed the federal government’s financial rescue powers. During the financial crisis of 2007-2008, the Federal Reserve, the Treasury Department, and the FDIC relied to a large extent on a set of long-dormant statutory provisions to create an array of programs to stem the panic and stabilize the financial system. Dodd-Frank carved back these emergency powers in significant ways. Summers is not the only critic of these carve-backs. Ben Bernanke, Hank Paulson, and Tim Geithner—the key orchestrators of the U.S. crisis response—are on record lamenting Dodd-Frank’s restrictions on the federal government’s crisis-fighting toolkit. “If you want peace, prepare for war,” they write.

What should the government’s financial-crisis-response toolkit consist of?