Over the last couple decades, we have had a very nice system in place:
The bankers give Congress lots of money.
The Congress passes laws favoring the bankers.
The bankers issue credit like crazy and collect bonuses on all the interest they would have gathered if only the loans had been good.
The loans go bad, the bankers leave with their bonuses and a new group of bankers gets help from the Congress and Washington's other institutions to keep the game going since the banks are "too big to fail."
The secondary remedy for saving banks that are too big to fail is to merge them with other banks, thus creating ever larger banks whose failure would pose ever more dire consequences for the economy.
The balls kept in the air a little longer, the politicians claim credit for expanding home ownership, etc, while hoping that if we can just juggle a few more balls, we'll make it through the next election cycle before the process restarts.
* * *
Since we've nationalized failure, it would be tempting to nationalize success as well. Right now, we have a lot of inefficiencies in the system to make it harder to see the extent to which our politicians and bankers manipulate things to insure their re-election and their bonuses respectively.
The problem with nationalization, of course, is that it would probably just improve the efficiency with which these two parties messed with our economic well-being for their own purposes.
It's time to figure out what "too big to fail" actually means. We should let more banks fail. And if it means a credit crunch while we sort out the mess, that is something we'll have to negotiate. Because right now, we're just setting the stage for the next bailout to prevent a credit crunch, a loss of faith in the financial system or whatever the excuse du jour is. Are we headed for a catastrophe? Absolutely. Are we already there? Quite possibly. Are we doing the same thing we always do? You bet. Which means we're headed for the same results. It's time to try something new. Maybe even real capitalism, with all the scariness that comes with the Schumpeteerian "creative destruction."
Post-script: In 1993, it was learned that French Prime Minister Pierre Bérégovoy was living in a damn fine apartment thanks to a sweetheart deal with some backers. His party was thrown out, and one afternoon he took a walk in the park and shot himself.
While I would wish no physical harm to Senator Chris Dodd and friends, the comparison is instructive. It's time our political class found a little shame for their role in this.
