Government-Financed Gambling

Good piece by Graham Bowley in The New York Times:

It may come as a surprise that one of the most powerful forces driving the resurgence on Wall Street is not the banks but Washington. Many of the steps that policy makers took last year to stabilize the financial system — reducing interest rates to near zero, bolstering big banks with taxpayer money, guaranteeing billions of dollars of financial institutions’ debts — helped set the stage for this new era of Wall Street wealth.

Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds, rather than in the ho-hum business of lending people money. They also are profiting by taking risks that weaker rivals are unable or unwilling to shoulder — a benefit of less competition after the failure of some investment firms last year.

The Obama administration felt that nationalizing and recapitalizing banks directly would require congress to appropriate far more money than was possible. After all, if you think “bailouts” are unpopular now, just ask what it would look like if Obama wanted hundreds of billions more. Instead, they’ve used regulatory forebearance and other techniques to put banks in a position to recapitalize themselves through trading profits. And that’s what we’re seeing here. It’s an ugly, ugly business. They’re basically gambling on the taxpayers’ dime and operating with an implicit taxpayer guarantee to cover their losses if they blow up.