Paul Krugman: Snoopy the Destroyer

Systemically important presidential elections:

Snoopy the Destroyer, by Paul Krugman, NY Times: Has Snoopy just doomed us to another severe financial crisis? Unfortunately, that’s a real possibility, thanks to a bad judicial ruling that threatens a key part of financial reform. …

At the end of 2014 the regulators designated MetLife, whose business extends far beyond individual life insurance, a systemically important financial institution. Other firms faced with this designation have tried to get out by changing their business models. For example, General Electric … sold off much of its finance business. But MetLife went to court. And it has won a favorable ruling from Rosemary Collyer, a Federal District Court judge.

It was a peculiar ruling. Judge Collyer repeatedly complained that the regulators had failed to do a cost-benefit analysis, which the law doesn’t say they should do, and for good reason. Financial crises are, after all, rare but drastic events; it’s unreasonable to expect regulators to game out in advance just how likely the next crisis is, or how it might play out, before imposing prudential standards. To demand that officials quantify the unquantifiable would, in effect, establish a strong presumption against any kind of protective measures.

Of course, that’s what financial firms want. Conservatives like to pretend that the “systemically important” designation is actually a privilege, a guarantee that firms will be bailed out. Back in 2012 Mitt Romney described this part of reform as “a kiss that’s been given to New York banks”…, an “enormous boon for them.” Strange to say, however, firms are doing all they can to dodge this “boon” — and MetLife’s stock rose sharply when the ruling came down.

The federal government will appeal…, but even if it wins the ruling may open the floodgates to a wave of challenges to financial reform. And that’s the sense in which Snoopy may be setting us up for future disaster.

It doesn’t have to happen. As with so much else, this year’s election is crucial. A Democrat in the White House would enforce the spirit as well as the letter of reform — and would also appoint judges sympathetic to that endeavor. A Republican, any Republican, would make every effort to undermine reform, even if he didn’t manage an explicit repeal.

Just to be clear, I’m not saying that the 2010 financial reform was enough. The next crisis might come even if it remains intact. But the odds of crisis will be a lot higher if it falls apart.