Elizabeth Warren Is Right: The Cromnibus Aids Crony Capitalism

Give her credit where credit is due.

Elizabeth Warren is right.

That doesn't happen very often, so it's worth taking note of before discussion of the Cromnibus—the $1 trillion spending bill Congress passed this past weekend — fades in the rearview mirror.

During last week's showdown over the bill, Warren objected to a provision eliminating a certain rule in the 2010 Dodd-Frank law. (Hang on, don't fall asleep just yet.) That rule prevented traditional banks from betting on financial derivatives with federally insured deposits. The banks could still trade in such exotic securities, but they had to do so with their own capital stock, through non-bank affiliates unsecured by FDIC backing. (In short, they had to "push out" such business.) The idea was to prevent future bailouts like the ones that took place six years ago.

The Cromnibus removes that barrier to bailouts. As Warren has noted several times, the relevant provision repeals a part of the law titled, "Prohibition Against Federal Government Bailouts of Swaps Entities." Most people understand why it's not a good idea to bail out financial institutions for making risky bets: It only encourages them to assume more risk than they otherwise would. If they bet right, then they get to keep the profits; if they bet wrong, then the taxpayer gets stuck with the bill. Warren is right to oppose such moral hazard.

She's right on a couple of other points, too: The language in the Cromnibus was written by Citigroup. And it had no business being included in a federal appropriations measure to fund federal agencies. Its inclusion in the spending bill avoided (most) public debate, and all but guaranteed the provision would pass, since even those who strenuously objected to it were not willing to shut down the government over it.

Now, the other side of the issue is not utterly devoid of merit. As a whole, Dodd-Frank imposes huge costs on the economy. The banks would not have to move all of their derivatives business to non-FDIC-backed affiliates, only some of it. The banks could still get emergency funds from the Federal Reserve, which reopens the door to moral hazard. And so on.

Nevertheless, the rule rollback is precisely the sort of crony capitalism that tea party types have railed against for years. It's big business as marionette—with Congress playing the part of the puppet, and the little guy stuck holding the tab when the big boys act irresponsibly.

The conservative protests against bringing back bailouts, however, were muted.

A few market-oriented publications did concede, almost as an aside, that moral hazard is generally a bad thing. "We're all for shrinking the taxpayer safety net," The Wall Street Journal admitted in an editorial otherwise devoted to excoriating Warren for not wanting to overhaul the entire Dodd-Frank apparatus in one swell foop. National Review conceded that the rule Warren defended "sounds intuitively appealing." But it then went on to note that the recent lowering of down payment requirements for federally backed mortgages creates much more risk than repealing the push-out rule would. OK—but does that make repealing the push-out rule a good idea?

It was up to movement conservatives to speak the unspeakable: Warren was right, and the establishment GOP was wrong. "So help me God, I have no way to refute the basic point that the Democrats are making," said a writer on RedState. "For many conservatives," wrote Noah Rothman on HotAir, "Warren … far better represented their position on the bill than did House Republican leadership."

Not just the leadership, either. Virginia's 7th District Rep. Dave Brat—he who knocked off Eric Cantor in a boggling upset in June—voted against the spending measure. But Brat (the only economist in Congress, as you might have heard) did so because it would fund President Obama's directive granting amnesty to illegal immigrants, not because of the sop to Citigroup and the other big banks. Indeed, his official statement explaining his vote against the bill made no mention of the banking measure or crony capitalism at all. It was left to the 3rd District's Bobby Scott to explain that he voted against the measure in part because of "a provision that will allow banks to speculate with taxpayer-insured funds."

In remarks before the spending bill passed, Warren quoted the RedState piece and said, "These conservative activists are right. If you believe in smaller government, how can you support a provision that would expand a government insurance program and put taxpayers on the hook for the riskiest private activities?"

Precisely.