Wall Street does have legitimate functions -- capital formation is important as is floating bond sales and other functions essential to business development. No debate there. The issues come about when banks, investment houses, hedge funds, and other players begin to take on unnecessary risks as a means to drive up short term profits. Then when the cash flow inevitably turns negative on these investments, these institutions come knocking on Washington asking for a bailout.
This, my friends, isn't capitalism, whose central tenet is the notion that institutions which manage risk well and make good decisions succeed while those who don't fail. Here's a case where we're not only subsidizing failure, but implicitly encouraging those same practices by removing moral hazard, which is ESSENTIAL to maintaining market discipline. Indeed Goldman Sachs and other "systemically important" institutions continue to engage in the same practices that lead up to the collapse of the market last year. Given this, we can fairly state that no lessons were learned, and in fact, major market players continue to take on risk with the implicit understanding that when the deck of cards collapses again (as it ultimately will, because these debt bubbles cannot be sustained long term), the government will be there to bail them out.
In fact, as I pointed out in another comment I made last week, these debts are being directly transferred over to the Federal Reserve's balance sheet as part of various loss-sharing agreements the banks and GSE's entered into. It is one thing to print excess liquidity to subsidize the debts of the financial sector, it is another thing to have our government and the Fed directly take on the debt! The result will be, ultimately, the destruction of the dollar as a store of value. The government is only pushing the ultimate result down the road, and making the outcome worse for everyone.
It isn't so much that the government is corrupt or owned by Wall Street as is the common narrative. When major financial players go to Washington, they frighten our representatives into believing that without government support the economy will fall into a tailspin from which it will never recover if these firms are allowed to fail. One Congressman even reported that Ben Bernanke claimed behind closed doors that there will be marshal law and chaos on the streets if the bailout bill was not passed.
My view is that we should have bitten the bullet last year and cleansed the system of the excess debt incurred over time. To avoid a complete freeze in the credit markets as the economic system readjusts, I would issue direct injections of government credit straight from the central bank, somewhere around the range of $1.5 trillion, at a very low interest rate with a long maturity, maybe 25, 30 years, to be used on infrastructure development, business development (incorporated within this is job development, upgrades of plant and equipment, manufacturing, mining, farming, construction and other forms of production of tangible wealth and commodities). Infrastructure will focus on upgrading our interstate system, developing a new railway system, upgrading our energy grid and water management systems.
Rather than putting money towards supporting technically moribund institutions, I think that we should be putting the money towards direct and productive uses that ultimately spur business and job growth and reorients the economy towards more productive and sustainable growth. As for the banking sector, the firms that took on excessive risk should be allowed to fail and those which operate prudently will eventually take on the slack. That is how capitalism should work. Government does have a proper role in this, but only as a means to facilitate commerce, as has been the case since colonial times through the New Deal.
We should never put our fates in the hands of Wall Street. The collapse of Lehman Bros. and the subsequent freeze in the credit markets that led to many business failures throughout the country should never be repeated.
