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“Saving” Banks

By Matthew Yglesias on March 20, 2009 at 9:48 am

"“Saving” Banks"

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Henry Blodget, going to battle on behalf of Wall Street’s welfare bonus babies, says:

The really distressing part is what this tax will do to the corporations that we now own and are supposedly trying to save.

(Remember? That’s the reason we bailed Citigroup, AIG, GM, and the rest of them out–to save them. Because we convinced ourselves that civilization would end if we didn’t.)

I think this hits upon a critical ambiguity in the bailout scenario. I, for one, don’t think that “saving” the too-big-to-fail financial institutions is or was among the legitimate purposes of our financial policy. The idea is—or at least ought to be—that we’re trying to prevent them from failing in a way that causes everyone else’s business to go under. When we let Lehman Brothers go down, it’s not as if that was a sad day for Lehman Brothers but everyone else just hummed along fine. It caused problems for everyone who did business with Lehman and problems for everyone whose business was deemed to resemble Lehman, and then lesser problems for everyone who did business with every firm whose business was deemed to resemble Lehman. That turned out to be a wider-than-expected swathe of harm and it brought down a money market fund. That, in turn, threatened the stability of all money market funds, which was threatening the viability of all kinds of companies’ ability to smooth cash flow and make payroll.

Post-Lehman, a determination was made not to have that happen again. Which meant preventing firms from going under. But it doesn’t mean “saving” Bank of America or Citi or AIG in the sense that the goal is that fifteen years from now Bank of America is still this giant firm with richly compensated executives. What we need to do is take these firms into receivership of some kind, pay off their obligations, spin off elements that are capable of running profitably as smaller entities, and attempt to resell their “toxic assets” for however much they turn out to be worth when the economy is growing again. That wouldn’t “save” Citi, it would kill Citi while saving people to whom Citi owes money.

But this is a genuine ambiguity running through the system. A substantial swathe of policy elites, starting with Hank Paulson and Ben Bernanke and George Bush and now evidently including Timothy Geithner and Larry Summers and Barack Obama really do seem to think that saving the firms is the key. That the world as it existed in the years 1996 to 2006 represents some kind of ideal of economic activity, and that they job is to put humpty-dumpty back together again. And it’s true that if you’re doing that, seriously curtailing pay at the bailed-out firms is counterproductive. But since that’s not what we ought to be trying to do, I see being counterproductive as a virtue. If you want to get rich quick, don’t go work for a government-subsidized zombie bank. Go start your own business, go work for a well-managed mid-sized bank and help them grow and prosper.

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