Pinstriped Protectionism

Tim Carney comments on the 10th anniversary of the big bank bailouts by looking at how the Troubled Asset Relief Program (TARP) was nothing more than protectionism for the financial elites:

But there are better words than cronyism for the bailouts of the late-Bush and early-Obama era. Protectionism is one. The power players—Geithner in particular—were set not just on propping up the financial system, but on propping up the current institutions. To give these public servants the benefit of the doubt, they believed that America’s economy needed Goldman, Bank of America, Citigroup, JP Morgan, and Wells Fargo, and needed them to be at least as big as they were before the crisis.

The stated reasons for government intervention were twofold: to prevent a disorderly fire sale of financial assets, which could cause a total market collapse; and to make sure banks kept lending money.

The latter didn’t happen. On October 12, 2008, Bernanke, Geithner, Paulson, and friends pumped $125 billion into nine big banks, charging them cheap rates. The banks did not lend that money back out to small businesses and homebuyers. They used the cash to shore up their weak positions.

And on the score of preventing a fire sale of assets held by the banks? There are ways that government can do that without making it a point to save the banks. Bankruptcy often involves winding down failed firms in a manner that minimizes the losses taken by creditors and counterparties. It can be structured so as to prevent a disorderly liquidation.

Citigroup, in particular, was a failed bank. It was, coincidentally, also the bank where Geithner’s mentor, Robert Rubin, had been an executive. In fact, in 2007, Citigroup investor Sanford Weill reportedly tried to talk Geithner into becoming Citi’s CEO.

Geithner and crew could have reduced the moral hazard and moral outrage of TARP had they wound down Citigroup. But Geithner wanted Citigroup to keep existing. It was pinstripe protectionism.

Geithner once in a while would talk as if some TARP programs were for helping homeowners keep their homes, but in private, Geithner admitted his goal was to “foam the runway” for the banks—that is, to save them on their crash landings.

An economic system where the big guys are never allowed to fail precisely because they are big is not a just system. When you look at the revolving door actions of these guys—Rubin, Geithner, Bernanke, Orszag, and all the others—the unfairness is more obvious.

That glaring injustice gave us the Tea Party, Occupy Wall Street, Donald Trump, the Resistance, and the bubbling anger over our politics today. But even without examining these reactions to the bailout barons’ actions, the injustice of the bailouts was harmful because injustice is always harmful.

Read the whole column here.

The truth is, in a free-market any rich business person could become poor if they misjudge consumer preferences and stop providing consumers with what they want.

In a true free-market, low income individuals still enjoy access to a wide variety of goods and services and the opportunity to better themselves. In a regulated economy, those opportunities are closed off by laws and regulations designed to benefit entrenched interests.

Of course, the poor suffer the most from the Federal Reserve’s inflation tax, while the Fed’s policies help financial elites. We won’t know the full extent to which the Fed helps the big banks, Wall Street firms, and other special interests until Congress passes Audit the Fed. Please help make that happen.