What do you call a policymaker who approves a policy, participates in a decision, or takes a significant action, then calls the action unconscionable without admitting that he made a mistake? I’d say that’s a person who is untrustworthy: someone who practices the standard Washington sidestep when something doesn’t go right. In March 2010, Federal Reserve chairman Ben Bernanke called the government bank bailouts unconscionable, just eighteen months after they occurred. Do you think he would have said that if they had worked, and if taxpayers had approved?
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.
Ben Bernanke’s and Treasury Secretary Henry 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 had not seen a financial panic like the panic of 2007-2008 for a long time. We had never seen government officials try to rescue bankers with taxpayers’ money on this scale 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, almost condescendingly, they rummage around in some old literature to come up with a concept that suggests 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 when one is protected from its consequences. Insurance is one way to protect yourself against risk. Reliance on taxpayers’ money to cover your losses 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 is the same whether you threaten or not: you use someone else’s money to meet your financial obligations. You can go to Las Vegas and lose several million dollars, but it doesn’t matter because some angel or sap steps in pay 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 honestly. They worked for their families responsibly, earned money and paid their debts with openly and integrity openly. They lost their livelihoods and often their homes in a panic they didn’t create. Now they can’t find work 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. Everyone talks about recovery now, but we have millions of families who have not recovered.
Ben Bernanke says the bank bailouts are 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 I wonder whether the people who brought on the panic of 2007-2008 and the Great Recession would even recognize their mistakes, let alone admit them. I suppose if my mistakes could be construed as crimes, I wouldn’t want to admit them either.
Originally published March 21, 2010. Revised and updated February 2, 2013.