17 July 2009


Ezra Klein | "It Is What's Known in Business as the Invisible Government Scaffolding of the Free Market"

The real information in that clip from Thursday's 'Daily Show'? Jon Stewart -- or someone in his office -- read Matt Taibbi's blog post explaining the basis for the $3.4 billion Goldman Sachs made during the second quarter. And so should you. That basis, after all, is your money. And it's not just Goldman. J.P. Morgan made $2.7 billion in profits. Bank of America -- remember when it almost collapsed? -- reported $2.4 billion.

You should, of course, be celebrating. We're back to 'normal.' It's a recessionary normal, but a form of normal nonetheless. The only problem is that it feels like hell. No one wants a normal where Wall Street took hundreds of billions in emergency taxpayer dollars and went back to pocketing billions for themselves. And it's not just the billions we gave them but the trillions they took: The crash was in no small part their fault. But though the rest of us remain trapped in recession, they're back to triumphant quarterly reports.
This is a Goldilocks worldview: banks are bad for loosing too much money; banks are bad for making too much money; banks should be recording profits that are juuust riiiight.

Look, you can't bolster the health of the financial system without bolstering the health of financial institutions. The entire point of last fall's bailout was to make banks profitable and hence stable again. I didn't really like it then, and I don't like it now, but that was the whole point. Almost everyone in the mainstream on both sides of the aisle (including both McCain and Obama) were yelling themselves hoarse about how we needed more bailout Right This Minute. And now everyone who can carry a pitchfork or a torch is freaking out about banks bouncing back strong. Bullshit. This was exactly the goal of the bailout.

Don't take my word for it:
The Economist | Free Exchange | More Goldman madness

Sorry, what tax revenue has been pilfered? As of June, the Congressional Budget Office estimated that the cost of TARP assistance to financial institutions would only be around $70 billion or so. If we're focused on Goldman specifically, the direct cost is just about nothing. Mr Taibbi points to the AIG assistance and the fact that AIG basically paid out its obligations to Goldman Sachs in full and says that barring that payout, Goldman would have folded. Not likely; Goldman was completely hedged against AIG.


And yes, there are billions in profits, but that was the idea all along. As Matt Yglesias reminds us, the plan has long been to prop up banks with guarantees and limited assistance and let them earn their way to recapitalisation. Why? Because if failing banks were instead seized by the government, debtholders would have to be paid off to the tune of hundreds of billions of dollars to avoid a systemic meltdown. And Congress was simply not about to pony up hundreds of billions of dollars for yet another bank bail-out. So this is what happened instead. The government created the conditions under which banks might be highly profitable so that capital cushions could be rebuilt. Things appear to be working like a charm.
Klein continues:
Economic policy these days is like the old hypothetical where you had to decide whether you'd crush the skull of a little girl if it would save a preschool full of children. It's good that the economy didn't collapse. But the way we went about saving it sure doesn't feel good, and the welfare kings on Wall Street aren't doing much to make it feel better.
I don't like how this mess feels either, but then again, I try not to make these kind of decisions based on how things feel. Choosing based on feelings is fine if you're deciding on a new pair of shoes, but for weightier matters I prefer a method more like: P(financial system collapse) * Cost(financial system collapse) > Cost(financial bailout)?

A related point: Klein asserts that money has been taken from the "working class," and Matt Taibbi claims it has been taken from the "middle class." Not so. Money was taken from tax revenue generally, which is, of course, mostly derived from upper income brackets. We can argue about who the bailouts benefit most. I happen to think that everybody benefits from a working financial system in the same way that everyone benefits from a working interstate freight system, with obviously the most direct benefits accruing to bankers and truckers, respectively. This is important especially if you think the total utility to society of a bailout is less than the cost of the bailout. I think there's a very high probability that the cost of the bailout, especially factoring in moral hazard, outweighs the benefit. But be that as it may, it's disingenuous to nakedly assert that this particular spending is laid disproportionately on the backs of a particular class or tax bracket.

Klein goes on to tie his rant into support for the current Congressional health care reforms. Executive summary: "we wasted poor people's money on your grand, foolish gesture, so now let's waste rich people's money on my grand, foolish gesture." In addition to the assumption that the bailouts cost lower income people more, he also implicitly asserts (as does Matt Yglesias) that the group of higher-income people to be taxed surtaxed for health care reform are entirely coincident with the group of higher-income people work in the financial industry and are benefiting from bailouts.

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