Jon Huntsman’s Game-Changing Plan To Reform Wall Street

Posted by | November 25, 2011 14:57 | Filed under: Top Stories

By Yashwanth Manjunath

With the exception of the iconoclastic Ron Paul, the GOP presidential field is filled entirely with candidates who subscribe to the same uninteresting and toxic formula of religious extremism and crony capitalism. But Jon Huntsman may have finally given empirically-driven voters a reason to support someone other than Barack Obama, by devising a truly game-changing Wall Street reform proposal that goes much farther than the largely toothless Dodd-Frank legislation.

Here are the key elements of his plan:

 1. Set a hard cap on bank size based on assets as a percentage of GDP. (This cap would be on total bank size, not using any of the illusory “risk-weights” currently central to thinking about bank accounting. The lowest risk assets for banks in Europe, supposedly, are sovereign debt—yet this very same debt is now at the heart of the current crisis.

2. We should have a similar cap on leverage—total borrowing—by any individual bank, relative to GDP.

3. Explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy.

4. Impose a fee on banks whose size exceeds a certain percentage of GDP to cover the cost they would impose on taxpayers in a bailout, thus eliminating the implicit subsidy of their too-big-to-fail status. The fee would incentivize the major banks to slim themselves down; failure to do so would result in increasing the fee until the banks are systemically safe. Any fees collected would be used to reduce taxes for the broader non-financial corporate sector.

5. In addition, focus on establishing an FDIC insurance premium that better reflects the riskiness of banks’ portfolios. This would provide an incentive for banks to scale down, allowing the financial system to absorb them organically in the event of a collapse.

6. Strengthen capital requirements, moving far beyond what is envisaged in the current Basel Accord. The Accord is a mixture of regulatory oversight and political compromise. As a result, the U.S. has allowed its banking policy to be determined by the “least common denominator” among European and Asian countries, many with a long history of not being prudent.

Huntsman’s reform plan goes to the very heart of the problem on Wall Street; the existence of “too big to fail” banks, and their continued subsidization for engaging in risky and potentially devastating economic behaviors. The devil here is in what numbers are used to cap bank size and restrict leverage. If the leverage ratio is too close to the pitiful Basel III number, or the bank size cap is too close to present-day levels, Huntsman’s plan would be just as milquetoast as Dodd-Frank. But if those details are worked out properly, this is the first proposal I’ve seen by any presidential candidate that would truly end the “crisis-bailout-crisis-bailout cycle” in a rational and thoughtful manner.

Is it possible that Jon Huntsman of all people becomes the “Occupy Wall Street” candidate for President?

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