Congress is considering an extremely dangerous idea almost nobody has heard of


Inevitably, Congress has more attractive uses for new funds than it has sources of new funds, so there is always is a desperate search for “pay-fors” — measures that are scored by the Congressional Budget Office as raising revenue or reducing outlays and so can be used to finance new initiatives. The pressure is particularly acute this year with the ambitious plans of the new administration. There is also the likelihood that the use of the budget reconciliation procedure will preclude careful deliberation of proposed pay-fors.

I recently learned of a particularly dangerous pay-for that may have superficial appeal —the repeal of Orderly Liquidation Authority (OLA).  This repeal, if enacted, will exacerbate moral hazard, impair financial stability, increase economic vulnerability and in all likelihood increase the national debt. It would be a major unforced error.

OLA is a new bankruptcy-type provision included in Dodd-Frank financial reform legislation that gives the Federal Deposit Insurance Corp. the authority to resolve insolvent systemic financial institutions (think future Lehman-like episodes). It allows the FDIC to borrow funds from the Treasury to support the liquidation of such firms with the proviso that in the event of any losses, fees will be levied on bank holding companies and other financial institutions to fully reimburse the Treasury. This authority is a wholly rational response to the gaping hole in our financial architecture evinced by the catastrophic Lehman failure, where policymakers’ only alternatives were uncontrolled bankruptcy or taxpayer-financed bailout. Had it been in place in 2008, much carnage could have been avoided.

So, much is wrong with eliminating OLA in order to get about $20 billion in CBO-blessed revenue.

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