When Republican Senator Mitch McConnell said yesterday that the Democrat’s proposed financial reform bill would perpetuate bank bailouts and make them more likely, he was following carefully polled talking points from strategist Frank Luntz. From the New York Times:

“We cannot allow endless taxpayer-funded bailouts,” Mr. McConnell said on Tuesday. “That’s why we must not pass the financial reform bill that’s about to hit the floor. The fact is, this bill wouldn’t solve the problems that led to the financial crisis. It would make them worse.”

The Republicans know that the best way to kill, weaken or discredit Democratic financial reform bills is to falsely equate efforts to limit and regulate too-big-to-fail(TBTF) banks with the unpopular financial bailouts that began and exploded under President Bush but which are now associated with the economic team retained by President Obama.

There is a huge debate now about how far federal regulators are/should be willing to go either to prevent large financial institutions from becoming TBTF or to break them up and/or regulate their risky behavior once they exist. But there is a important distinction between these two concepts:

(1) Allowing TBTF banks that are mismanaged to fail through normal bankruptcy, pretending we won’t step in regardless of the consequences for the rest of the economy; and

(2) Having federal authorities, like FDIC, take over TBTF banks that are mismanaged and sheparding them through a controlled failure — a "resolution" and dismantlement that attempts to mimimize the harm to the rest of the economy as they fail.

So the litmus test for US media is whether they can recognize and explain the difference. If they can’t, we’ll wind us with a public even more confused and misled on financial reform than it became on health care reform.

At The Baseline Scenario, Simon Johnson explains why this difference matters in Why Senator McConnell is Completely Wrong on Financial Reform:

In a Senate floor speech yesterday, Senator Mitch McConnell (Senate Republican leader) said,

”The way to solve this problem is to let the people who make the mistakes pay for them. We won’t solve this problem until the biggest banks are allowed to fail.”

Do not be misled by this statement. Senator McConnell’s preferred approach is not to break up big banks; it’s to change nothing now and simply promise to let them fail in the future.

This proposal is dangerous, irresponsible, and makes no sense. The bankruptcy process simply cannot handle the failure of large complex global financial institutions – without causing the kind of worldwide panic that followed the collapse of Lehman and the rescue/resolution of AIG. This is exactly the lesson of September 2008.

If a huge financial institution were to reach the brink of bankruptcy, the choice again would be: collapse (for the world economy) or rescue (of the very bankers and creditors who are responsible for the mess). The point of the reforms now before us is to remove that choice, as far as possible, from the immediate future.

There is only one plausible way to ensure banks that are currently “too big to fail” can actually fail: Make them substantially smaller. This is necessary but not sufficient for financial stability. . .

As Johnson, Krugman (appearing on MSNBC’s Countdown) and many others point out, much more is needed to bring these monsters under control. But none of that will work unless we can break them up to help lessen the risks they create and then provide a process for managing the havoc they may still leave behind. And to do that, we’re going to need the media’s help in explaining some hard concepts and warning their audiences when the con artists are trying to fool them again. Can the media lift their game?


Update (video): Senator Dodd responds to Senator McConnell

More:
McClatchy, Dodd blast McConnell for lying about reform bill
Mike at Rortybomb, Can the real economy speak? Republicans respond to financial reform
Rortybomb, Luntz’ Financial Reform Memo 1.

Put up or shut up suggestions from . . .
Robert Reich, the Republican Strategy on Financial Reform . . .
Mike Konczal, Can the real economy speak . . . (See point one, asking Republicans and Democrats" to explain how their solutions would have handled Lehman’s collapse in the Fall of 2008.)