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Deep Thoughts, Vol. II
Last fall, theology professor R.R. Reno wrote a long blog piece at First Things that defended the federal government's bailout from the attacks of his more ideologically pure brethren on the right. Professor Reno recently came back with a follow up piece this week that concedes that he angered a lot of his friends by breaking ranks and refusing to drink the Kool-Aid.
?Markets,? I was told, ?need to be allowed to take their course.? ?What about moral hazard?? some asked me. ?The market needs to punish bad decisions.? There was also an understandable rancor. ?Shouldn?t we just let the jerks get sucked down into bankruptcy??
The problem in the fall, of course, was that all of us would have gone down the same rat hole as the Wall Street geniuses who brought us mortgage-backed securities and credit-default swaps. The gears of international finance were seizing, and we were hovering on the edge of a catastrophic global run on all financial assets, even the most credit worthy.
Experts can debate the merits of the ever-changing bailout plans. Maybe Henry Paulson should have done this and not that?or that?or that. Look at the editorial pages over the last few months. There are as many opinions as there are eminent economists. But one thing is clear. The U.S. government stepped up as the global backstop for financial markets, and we avoided catastrophe.
The professor looks farther back than last fall, at the excess of global cash that was flying around the globe, that needed to roost somewhere, and that found plenty of turkeys to stuff chock full of filthy lucre right here in the good, old U.S. of A.
As we look back on the last decade, we should not be at all surprised that Wall Street bankers found lots of different ways for people to invest, including very risky and stupid ways that eventually put the global financial system at risk. That is what happens when too much money chases too little opportunity, something we?ve seen now for nearly two decades as a result (in part) of an accident of nature that puts vast oil reserves under economic black holes, official Chinese anxiety about the destabilizing consequences of allowing its vast wealth to transform its society too quickly, and slow growth in Europe that limits investment opportunity there. Our economy was like a duck being force-fed. And the housing market was the enlarged liver that investors wanted to believe would end up fine foie gras.
As to avoiding a repeat of the bubble of greed, Reno thinks the only way "is to put the fear of God into financial firms that are constantly tempted by the long line of people holding bags of money begging for investment opportunities." That's one reason that the executive compensation restrictions with which the Obama administration and Congress are threatening the banking system are a good thing, in Reno's view. However, they're a good thing for a reason that you might not consider, at first blush.
The political process saved these companies. Now I?m happy to see the political process putting the lead weight of regulation on their backs. I?d like to see Barney Frank signing off on all major decisions at Citigroup. That would guarantee counter- productive decision-making. In fact, I?d like to volunteer for similar treatment the other big banks that are up to their necks in toxic assets and only survive now because of huge infusions of taxpayer money. After a few years they will become rat holes for capital, lumbering giants more eager to please regulatory masters than meet the needs of the market. They will become failed legacy corporations too rotten even for vulture investors?de facto bankruptcy.
Here is the bottom line: Burdensome regulations for those taxpayers protected from the harsh discipline of the free market last fall is exactly what we need. (Crucial caveat: burdensome regulations only for those taxpayers saved from bankruptcy, otherwise the market losers end up insulated from the competitive disadvantages of burdensome regulations.) It would be great if Citigroup were unable to recruit top talent. We couldn?t allow a quick, free market death last fall. So a slow death by regulatory sclerosis over the next few years will have to do.
If you believe in the need for some form of market discipline (as I do), then slow death by excessive regulation of the too-big-to-fail losers on Wall Street is a pleasant prospect. I?m happy to have the president drive talent away from the Wall Street giants who served their clients and investors, and the common good, so poorly in recent years. I invite Congress to pile on. Nancy Pelosi should design social-justice norms for Bank of America?s lending program.
We know the end result. The Wall Street goliaths will wither and decline. Growth in the financial industry will emerge elsewhere. And a lesson will be learned. Rotting corporate carcasses focus the mind.
"Barney Frank signing off on all major decisions at Citigroup." "Nancy Pelosi should design social-justice norms for Bank of America?s lending program." I have to admit: such poetic justice would be perversely pleasurable. Who knew a theologian was so kinky?
One problem I have with Professor Reno's "moral hazard violation = just dessert consequences" equation is that with respect to Bank of America and most of the rest of the "Big 9" commercial banks, Hank Paulson called them to D.C., locked the door behind them, and told them that no one would leave the room alive unless he took TARP for the good of the country. Wells Fargo didn't want the cash, started to argue, and was told, in effect, to "get real." As to Barney Frank's recent wisecrack that the U.S. Government will gladly take a repayment of the TARP investment, everyone knows that he's blowing it out his nether regions. Citi and B of A (and others) used a boat-load of the capital infusion to absorb into their hives killer bees like Wachovia, Wamu and Merrill Lynch. Their balance sheets look a heck of lot different today, so refunds are likely not an option.
I'm not alleging that anybody couldn't have suddenly grown a pair of cojones and told Paulson where to stick it, but any big bank that did so would have spent the rest of their perhaps not-so-long existence being chipped away at by the likes of Sheila Bair and the FDIC jihadists. Sure, you can say that's like being stoned to death with popcorn, but regardless, those banks that are too big to fail are too big not to play whatever role the government wants them to play in bailing out the economy as a whole, whether or not they would have been "bailed out" otherwise. They didn't come crying to the government asking for capital. The capital came to them and "begged" them to take it.
Ultimately, the problem with singling out banks for moral hazard theorizing is that while banks were a big part of the problem, they were only one part of the problem. The participants in the decade of rampant greed that saw this huge bubble blow up and then pop were many and varied. In this debacle, the "moral hazard" pie of unwise decision-making, denial, and venality is big enough so that we all get a slice. That includes me. And you, too, professor. But look at it this way: since we bloggers love to open our pie holes and emit gas clouds of bloviation, it's only fitting that once in awhile, we get to stop them up with a fat wedge of humble pie.
Even a theologian ought to enjoy a down-to-earth consequence like that.
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