This stuff really is getting pernicious. Ezra Klein writes:
The real information in that clip from Thursday's "Daily Show"? Jon Stewart -- or someone in his office -- read Matt Taibbi's blog post explaining the basis for the $3.4 billion Goldman Sachs (GS) made during the second quarter. And so should you. That basis, after all, is your money. And it's not just Goldman. J.P. Morgan (JPM) made $2.7 billion in profits. Bank of America (BAC) -- remember when it almost collapsed? -- reported $2.4 billion.
You should, of course, be celebrating. We're back to "normal." It's a recessionary normal, but a form of normal nonetheless. The only problem is that it feels like hell. No one wants a normal where Wall Street took hundreds of billions in emergency taxpayer dollars and went back to pocketing billions for themselves. And it's not just the billions we gave them but the trillions they took: The crash was in no small part their fault. But though the rest of us remain trapped in recession, they're back to triumphant quarterly reports.
Don't read Matt Taibbi's post if you're interested in being informed, though it's of course always entertaining to watch him blow his top in print. Let me just quote one little bit of the rant in question:
So what’s wrong with Goldman posting $3.44 billion in second-quarter profits, what’s wrong with the company so far earmarking $11.4 billion in compensation for its employees? What’s wrong is that this is not free-market earnings but an almost pure state subsidy.
Last year, when Hank Paulson told us all that the planet would explode if we didn’t fork over a gazillion dollars to Wall Street immediately, the entire rationale not only for TARP but for the whole galaxy of lesser-known state crutches and safety nets quietly ushered in later on was that Wall Street, once rescued, would pump money back into the economy, create jobs, and initiate a widespread recovery. This, we were told, was the reason we needed to pilfer massive amounts of middle-class tax revenue and hand it over to the same guys who had just blown up the financial world. We’d save their asses, they’d save ours. That was the deal.
Hold on, slow down. Sorry, what tax revenue has been pilfered? As of June, the Congressional Budget Office estimated that the cost of TARP assistance to financial institutions would only be around $70 billion or so. If we're focused on Goldman specifically, the direct cost is just about nothing. Mr Taibbi points to the AIG (AIG) assistance and the fact that AIG basically paid out its obligations to Goldman Sachs in full and says that barring that payout, Goldman would have folded. Not likely; Goldman was completely hedged against AIG.
What about all those other guarantees offered by the government which have encouraged people to continue doing business with Goldman Sachs and the entire financial system as a whole? Those are worth trillions of dollars, aren't they? And the banks are using them to book billions in profits.
First, a guarantee only costs if it's invoked, and it's rarely invoked because it's a credible guarantee. If we just totted up the potential cost of federal deposit insurance it would be enormous, but of course the very existence of deposit insurance eliminates the threat of bank runs, meaning that it's only needed in cases of insolvency, which are generally rare.
And yes, there are billions in profits, but that was the idea all along. As Matt Yglesias reminds us, the plan has long been to prop up banks with guarantees and limited assistance and let them earn their way to recapitalisation. Why? Because if failing banks were instead seized by the government, debtholders would have to be paid off to the tune of hundreds of billions of dollars to avoid a systemic meltdown. And Congress was simply not about to pony up hundreds of billions of dollars for yet another bank bail-out. So this is what happened instead. The government created the conditions under which banks might be highly profitable so that capital cushions could be rebuilt. Things appear to be working like a charm.
Now, here is the complication. Ideally you want to let troubled banks fail, because if you save them, you face the possibility that moral hazard-induced excessive risk taking will lead to larger problems down the road. If you cannot avoid saving the banks, then some subsequent action must be taken to prevent this.
That subsequent action is regulatory reform—limitations on leverage, new rules on compensation, perhaps a bank tax to pay for oversight and future bail-outs, and so on. There is a regulatory reform bill in the works. It is important that that bill meaningfully limit the extent to which firms can abuse the backstop implied by recent government interventions. That's the battle that needs to be fought.
But that's not what we're getting. Instead, journalists seem to be falling over themselves to out-pitchfork each other and pretending that the economy would be much, much better off if the country's large financial institutions weren't reporting profits and having success raising private capital. This makes no sense.
Obviously, the interventions undertaken during the financial crisis were an ugly business. But they seem to be having the desired effect, and it's distracting and counterproductive for financial writers to keep acting surprised by the fact that this was how the government chose to address the situation.
This article originally appeared on The Economist.com