Nicole Gelinas writes today about how the financial reform bill will push the economy in the wrong direction.  Instead of ending too-big-to-fail, it will enshrine it, and it will continue to encourage the financial sector to push greater borrowing and lending in the same irresponsible manner that preceded the recent crisis. She writes:

For 25 years, Washington has done everything in its power to subsidize Americans’ profligate borrowing habits. Debt became the fuel for economic growth. Washington subsidized the financial industry’s borrowing through implicit guarantees against loss.

The feds first started rescuing creditors to “too big to fail” banks in 1984. Since then, it’s become clear to lenders — Wall Street’s global bondholders and trading counterparties — that the government would save them anytime a large financial firm foundered.

Indemnified against losses, bondholders could lend nearly infinitely to Wall Street. Wall Street found creative ways to lend that money right back to the public, through mortgage brokers and credit card marketers….

The Dodd-Frank bill is a monument to the status quo. Despite promises that the bill will end bailouts, it enshrines bailouts into law.

It provides for an “orderly liquidation authority,” for example, which allows “systemically important” financial firms to escape bankruptcy and to escape, too, consistent losses for their creditors. It also sets up a fast-track procedure through which the White House can ask Congress for guarantees for Wall Street’s lenders in a future crisis.

In effect, the government is saying to Wall Street’s lenders: Carry on as you did before 2008.

The problem isn’t just that the implicit government guarantee of a bailout creates perverse incentives for financial services companies. It also creates great uncertainty about which companies will qualify for a bailout and which won’t, and what lenders can expect from the “orderly liquidation process.”

Mary Kate Cary recently wrote critiquing Speaker Pelosi’s statement that unemployment benefits are the most effective stimulus for creating jobs. She notes (as did IWF’s Julie Gunlock) that this Administration has almost no private sector experience itself and that uncertainty being created by Washington is helping fuel the jobs crisis. She writes:

Pelosi’s remarks clearly show the disconnect between the Democratic Party and Main Street businesses. A quick look at Pelosi’s bio shows that, like President Obama, she’s never run a business or had to meet a payroll. She doesn’t seem to understand the uncertainty that so many businesses are facing because of the massive expansion of government and the spiraling deficits: Most businesses are facing the specter of unknown healthcare costs and higher taxes. So no wonder unemployment remains so high–most businesspeople I know are waiting to see where it all shakes out. “High uncertainty is the enemy of investment and growth,” economist Allan Meltzer wrote in a great piece this week in the Wall Street Journal on the common-sense reasons why the president’s stimulus plan has failed to solve the unemployment problem.

Businesses need to know the rules that they are going to operate under before they start expanding and hiring workers.  Although, given that it’s clear that if the Administration and this Congress have their way there would be much higher taxes and more regulation, maybe uncertainty is better than the alternative, at least for a few more months…