Sorry, our government caused the financial crisis, failed to save us from its effects, and has done nothing to prevent a recurrence.

Yes, taxpayers might wind up having made a little bit of money on TARP, though that does not mean they could not have gotten a better deal.  Yes, the financial markets did not suffer a total meltdown, but that does not mean we would necessarily have suffered one if the Fed had refused to fund the bailout of  the AIG counterparties and had contented itself with merely supplementing the FDIC support for individuals and smaller businesses.  Yes, the government should not be in the business of deciding how much money Wall Street firms and executives should make, but it also should not be in the business of deeming those firms “too big to fail” and supporting their high-risk investments with cheap loans and implicit guaranties.

Once upon a time, even our biggest commercial banks limited themselves to commercial banking, investment firms provided investment services and investment banking, and investment banks were investment banks.  Over time, financial people learned that investment services and investment banking were more lucrative than commercial banking, that direct-investment for your firm’s own account was more lucrative than any kind of services for your customers, that hedge fund operations were more lucrative than any conventional form of investment operations, and that technologically-boosted, hugely leveraged, risk-exposed investment activities were more lucrative than conventional hedging.  All along the way, government was the legal enabler of this progression.

What we are now left with is a small collection of superbanks that make most of their money from the deployment of supergeeks and supertechnologies in investing in high-leverage, high-risk plays in derivatives, dark pools, and other mysterious activities that make no money for anyone other than the banks.  These “banks” perform no services to consumers or the business community that could not be readily and efficiently performed by our remaining, smaller commercial banks and investment banks.  If the bailouts and stimuli have proven anything, it is that keeping the big banks in business has not had the effect of making loans available to consumers and businesses.  There is no good reason to bash the big-bankers, but there is also no good reason to continue to pamper the big banks.

[Posted on 10 Feb 2012]

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