Federal Bailouts: Good or Bad?

The debate over the propriety of bailing out institutions "too big to fail" with the funds of the taxpayers those institutions impoverished misses the real point: the issue is not "whether" but "how."

A bailout designed to preserve the ill-gotten wealth of uber-rich criminals, which comes very, very close to defining the Bush-Obama bailout of 2008, clearly sends citizens the message that government is of the elite, by the elite, and for the elite.

Goldman Sachs: One of the winners
CC Sharealike; Supplied by Zemanta

In contrast, a bailout with teeth to punish the guilty and clean up institutions that, at their core, may--after intense government and public scrutiny--be judged to have some social value would be something else. The evidence is overwhelming [e.g., Black, Morgenstern, U.S. Senate report as cited repeatedly in this blog and Senator Bernie Sanders (Independent/Vermont) recent remarks] that a huge number of major financial criminals from Wall Street, major banks around the country, mortgage companies, politicians, and Fannie Mae who helped bring us all the recession of 2008 have been allowed to go free with their stolen loot. But perhaps that evidence is, in part, erroneous or incomplete: figuring that out is what the justice system is for, and that justice system should be used.

Imagine a bailout given in return for complete transparency to government regulators, the arrest and trial of senior corporate figures, agreement by the institutions aided to support new regulations, and appropriate punishment (e.g., the seizure of all financial gains, the firing and banning from the financial world for life) of all corporate leaders found guilty of fraud.

___________________________

The Appearance of Collusion

As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.

Leading up to the financial crisis, many officials said in interviews, regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis — weak regulation — also made it harder to pursue fraud in its aftermath.

A more aggressive mind-set could have spurred far more prosecutions this time, officials involved in the S.&L. cleanup said.

“This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity,” said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government’s director of litigation during the savings and loan crisis. “But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here.”[Gretchen Morgenson and Louise Story, The New York Times 4/14/11.]

___________________________

Some institutions are too big to be allowed to crash and burn without public oversight. Bailouts will surely be needed again in the future. All that is a separate issue from whether or not individuals or institutions should be held responsible for intentionally harming society. The issue of bailouts is tactical, and the right answer is, "It depends." The issue of responsibility, which modern Americans try to hard to evade, is strategic, and the proper strategy for a decent society is to insist on responsibility.