Tyler Cowen Is Very Wrong

Tyler Cowen has a truly bizarre column in this morning's New York Times. He argues that there's "a big hole" in the Obama administration's proposals to reform financial regulation: "the new proposals immunize the creditors and counterparties of [firms like AIG] by protecting them from their own lending and trading mistakes." He goes on at length about how the administration's proposals "neutraliz[e] creditors," and thus risk "creating a class of institutions whose borrowing is, in effect, guaranteed by the government."

This is 100% untrue.

The Treasury's proposals specifically included a proposed resolution authority for systematically significant finanancial companies like AIG, modelled on the FDIC's resolution authority. And like the FDIC's resolution authority for insured banks and thrifts, the Treasury's proposal gives the FDIC the power to impose pain on creditors—which is exactly what Cowen criticizes the Obama administration for failing to propose! Specifically, the FDIC would have its traditional powers of avoidance, as well as the power to repudiate "burdensome" contracts.

This undercuts Cowen's entire column. I honestly don't know how he could have missed this—the proposed resolution authority was the most talked about aspect of Treasury's proposed financial regulations. What's even more amazing is that the NYT's editors let Cowen's column go to press. I guess they don't read their own paper.