Commentary: Shelby, McCain advice to let banks fail is dubious

This editorial appeared in The Kansas City Star.

Sens. Richard Shelby and John McCain say they're tired of watching bailout after bailout of major U.S. banks. If banks are insolvent, the two said last weekend, it's time to let them fail.

As Shelby put it, "Close them down. Get them out of business." He wasn't specific about which banks he would close, but he added that perhaps Citigroup – which he called a "problem child" – should be on the list. On Tuesday, Citigroup said it operated at a profit for the first two months of the year, triggering a solid rally in stock prices.

McCain accused the Treasury Department of putting off tough decisions.

The question, though, is whether simply allowing a few banking giants to collapse might trigger something financially and economically worse. Certainly the taxpayers can't shovel in money forever, but federal officials should proceed with extreme care.

The two Republican senators aren't the only ones expressing dissatisfaction. Tom Hoenig, president of the Kansas City Federal Reserve Bank, said in a recent speech that it was time for the government to move more aggressively. The speech's title: "Too Big Has Failed."

Grant Burcham, chief executive officer of Missouri Bank, says he’s frustrated with the inequity of the "too big to fail" doctrine, a policy that favors the larger players. He says his bank has worked hard to keep its balance sheet clean: "We knew if we stumbled severely, no one would be there to bail us out."

To read the complete editorial, visit The Kansas City Star.

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