What do you call a guy who approves a policy or an action, then calls the action unconscionable without admitting that he made a mistake?
I’d say that’s a person who is untrustworthy. I’m sure Bernanke sees the matter differently.
George Stigler, an economist at the University of Chicago before his death in 1991, developed a theory of regulatory capture that explained why government keeps failing in its efforts to oversee economic institutions. Again and again, we see that supervisory governmental agencies become beholden to the institutions they’re supposed to regulate. The SEC and its failure to investigate Bernie Madoff is a recent example of that.
Bernanke’s and Paulson’s bailouts take this idea several steps further. These actions involved so much money, and showed government officials acting in such disarray, fear and panic, that they’re evidence of state capture by large financial institutions. We’ve never seen anything like that before.
We’ve seen cases in our history where the balance of power between Wall Street and Washington shifted this way or that, but we’ve never seen an instance where Wall Street’s interests dominated Washington’s decision making to this degree. Everything that followed the bailouts, including the business-as-usual bonuses, stalled financial reform, policymakers’ fussing and fuming right up to the president himself, and the bailouts’ complete failure to loosen up credit or deal with so-called troubled assets – all of these developments after the crisis show that large financial institutions captured the state, then drew down the public treasury to ensure their own survival.
Large financial institutions said that if the Treasury and the Fed did not fork over the money, we would see a depression worse than anything we have ever experienced before. They said that if the government did not back them up, the entire financial system would collapse. A lot of important people took their word for it, and they turned over our assets to the bankers. In so doing, they changed the morality of our financial system forever. The policymakers like to talk about moral hazard. What a euphemism to distract from their own failure to do what’s right! They can’t justify or defend what they did in normal terms, so they throw out this stupid phrase to acknowledge that perhaps what they did wasn’t quite the right thing to do. Prevarication is the first refuge of cowards.
Moral hazard actually has a specific meaning in the economic lexicon. It means lack of incentive to guard against risk where one is protected from its consequences. Insurance is one way to protect yourself against risk. Asking for taxpayers’ money is another way. Threatening to take the country’s financial system down with you adds an extra layer of moral hazard to the process. The result’s the same whether you ask or demand: you use money that’s not yours to meet your financial obligations. You can go to Las Vegas and lose several million dollars, but it doesn’t matter because you ask other people to cover your debts. Later you act as if it was an unfortunate incident. No, it won’t happen again. Yes, we’d like to forget about it, wouldn’t you? Thank you, let’s stay friends. No hard feelings.
Meantime, we have fifteen million people unemployed, and we are still trying to create jobs for them by spending public funds. Most of those people did not gamble. Most of them conducted their financial affairs with integrity. They acted responsibly, honestly and openly. They lost their jobs in a panic they didn’t create, and they can’t find work now even though the panic is past. Family’s are falling apart, homes are still coming under foreclosure, and we are losing desperately unhappy people to suicide every day. And Bernanke says the bank bailouts were unconscionable. I know what’s unconscionable: bankers without integrity, bankers who greedily take risks with other people’s money, lose on their bets, ask others to cover their losses, and don’t admit they did anything wrong. Bernanke participated in that process because it unfolded on his watch.
Everyone makes mistakes, but bankers seem to have more difficulty admitting them than others.