Anytime you have Matt Yglesias and the Wall Street Journal singing from the same hymnal, you have a point that's impossible to ignore - as Yglesias himself says, it's not often that one get's the chance to agree with the Journal's Opinion pages.
In this case, the point on which the two are in agreement is that while Goldman Sachs' lauded intention to begin repaying its bailout money is unquestionably a good sign, we shouldn't forget that such a repayment will just be the beginning of getting Goldman off the government liability books. The primary reason for and beneficiaries of the federal bailout of AIG was protection of the insurance giant's trading partners, or "counterparties", and Goldman was among the largest of those, if not the single largest (they deny that they had any "material exposure", but that denial is just implausible hogwash).
As the Journal article points out, Goldman was protected to the tune of 100 cents on the dollar by the Fed's "Maiden Lane III" loan facility, whereas Merrill Lynch got 13 cents last year in a similar counterparty bailout (obviously, 13 cents on the dollar wasn't enough, since Merrill is now famously part of Bank of America - a transaction you and I also paid handsomely to subsidize).
The problem here, apart from the inequity of how Goldman has been protected while others have been allowed to collapse, is that repayment of the direct loan doesn't remove Goldman's reliance on federal largesse. Even more important than the counterparty bailouts they have gotten from both Fed and TARP money is the fact that the perception that these institutions are too big to fail has been solidly reinforced by the fact that the government didn't let them fail.
That perception presents a huge moral hazard problem that has yet to be addressed in any way. It was always so that any bailout of the financial system carried much of that moral hazard problem with it, but the Fed and Treasury under the last administration concluded (I think correctly) that the price of doing nothing and allowing the complete collapse of the world's financial structure would be so high that it would be worth risking that moral hazard to prevent it.
Deciding that it's worth the risk is not the same thing, however, as saying that no palliative measures should or can be taken to minimize the incentive impacts of those guarantees. Once you've bailed out the offending companies and their counterparties (ahem, like Goldman), you need to immediately begin a process to ensure that they don't just use the now certain fact of a federal loan guarantee to make even riskier bets than those that got them in trouble in the first place.
This hasn't happened in Goldman's case, and it hasn't happened to any of the other institutions that are still standing either. The Fed's window is still open to all of these guys, giving away free money that the banks are sometimes willing to lend to someone else, but are mostly using to repair the balance sheets they laid waste to with bad paper. I notice that Goldman hasn't said they'd like to see that stop anytime soon.
In addition, thee has yet to be any meaningful beginning to the promised effort to re-regulate these institutions so that they don't remain too big and too interconnected to fail. The absence of such regulations makes it a certainty that we'll have to bail them out again, because the incentives are all on making risky short term bets without regard to risk exposures. If Uncle Sam is going to pick up the check, why take less profit (either as a corporation or a CEO) to protect against risk?
This adds one more voice to the unusual chorus of agreement we're seeing here - the European leaders of the G20 countries who told President Obama two weeks ago that they would make no further commitments of cash to the recovery, and more to the point, wanted to see a much more aggressive effort to impose regulations on this behemoth of a financial system that keeps careering around wrecking lives while its operators get rich on fees and uninsured risks.
They're right. They refused to pump more cash into the banking system on the legitimate grounds that they already provide a social safety net that makes our system look positively barbaric and goes a long way to prop up demand in their economies, and if we don't re-regulate these institutions and break up their power to fiddle our economy, we're going to pay again and again for their mistakes, because we won't have any choice - they'll still be too interconnected and "too big to fail".
Yikes. The Wall Street Journal's opinion page, Matt Yglesias, and the G20 finance ministers? Strange bedfellows indeeed!
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