The Role of Government: Keeping the Wealthy Rich

For some reason most of the
discussion in Washington and the media of the bank bailouts is
overlooking their central feature: taxpayer dollars are being used to
sustain the income of incredibly rich bankers. The public should be
furious over this upward redistribution of income.

The basic story here is very simple. If we got the government out
and left things to the market, virtually the entire banking sector
would be bankrupt. Citigroup, Bank of America, Goldman Sachs, Morgan
Stanley and almost all the other big banks, and thousands of smaller
ones, would be out of business. (My bet is that even "healthy" banks
like Wells Fargo would be in bankruptcy before too long. They hold
plenty of bad debts, too.)

Most of the top executives of these banks would likely be sent
packing, while those remaining would have their compensation (including
"golden parachutes" and bonuses) set by bankruptcy judges who would be
running the companies in the interest of the creditors, not the
shareholders. The shareholders themselves would be out of luck for the
most part. Many bank stocks have already lost 80-90 percent of their
value over the last 18 months. Bankruptcy would likely eliminate what
little remains.

However the banks are not in bankruptcy because the confused state
of affairs and potential lost of creditors' wealth created by
large-scale bankruptcies in the financial sector would be a devastating
hit to the economy. This is the rationale for the TARP, the various
special lending facilities created by the Fed, and other measures to
ensure the survival of the banking system.

The government has intervened in a huge way to keep the market from
taking its course. But the key issue that has been buried in the debate
in the media and political circles is the separation of the interest of
the public in a functional financial system and the interests of bank
executives in high salaries and shareholders in getting returns on
their capital.

At this point, the banks are desperate -- they would be dead without
government handouts. This means that the government can set whatever
terms it wants. And, for both economic and moral reasons, it has an
obligation to set terms that do not reward the bank executives and
shareholders.

The bank executives and shareholders took big risks that went bad.
If they are rewarded with taxpayer handouts, then the message this
sends to the financial sector is to keep taking irresponsible risks.
The game becomes heads they win, tails we lose. If the bets pay off,
then they are incredibly rich. When the bets go bad, the taxpayer gets
the tab.

The moral reason for not rewarding executives and shareholders is
that these rewards require the taxation of middle income people, like
truck drivers and nurses, to transfer money to some of the richest
people in country.

This sort of upward redistribution is difficult to justify. Usually
people in the United States like to believe that the market determines
the distribution of income. Many get outraged over the idea that a
mother on TANF can get a check for a few hundred dollars a month from
the government. In this case, the government is effectively handing
checks of millions of dollars to bank executives who would be out of
work if the market was left to run its course.

We have to keep the financial system functioning, but we can do this
without transferring hundreds of billions of dollars from middle class
taxpayers to the wealthiest people in the country. If the bailout
conditions imposed by the Obama administration and Congress don't
effectively eliminate shareholder wealth in the bankrupt banks and
bring compensation (in whatever form) of bank executives back down to
main street levels then it is can only be explained by corruption.
There is no excuse for this massive intervention to redistribute income
upward.