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Recapitalization Through Profits Isn’t Pretty

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"Recapitalization Through Profits Isn’t Pretty"

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Wall Street hotshot won't be taking the subway (cc photo by epicharmus)

Wall Street hotshot won't be taking the subway (cc photo by epicharmus)

Reacting to the news that financial sector paychecks are set to regain their boom-era peaks after a single down year, Kevin Drum snarks “As long as bankers are paid obscene salaries and bonuses, all is right with the world. I’m sure we’ll all rest easier tonight knowing this.”

As I’ve said before it’s important to understand this as part of a deliberate strategy. The Obama administration didn’t want large financial institutions to fail. They also didn’t want to try to get congress to appropriate funds on the scale that would be needed to take the banks over, clean house, and recapitalize them publicly. What they came up with was a strategy of implicit and explicit guarantees designed to allow financial institutions to recapitalize themselves through profits. And big profits mean big paychecks. This is an ugly solution to the problem, but for whatever it’s worth it’s working.

But obviously this creates a massive problem of social justice. A problem that, I think, is part of the case for why there should be more tax brackets and higher taxes on rich people.

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