Near the end of his New York Times column this past Sunday, Frank Rich observed that corporate bailouts will be the new third rail of American politics. His analysis in that regard is indisputable. However, the huge sums invested in shoring up the financial sector so far are clearly going prove inadequate to bring about the desired stability to the credit markets.
The voters are against bailouts in principle, but would not likely confer approval on whoever caused an economic collapse by refusing to provide them. In the event that the Obama administration stopped the bailouts in deference to popular opinion, the electorate would find themselves in an accelerating downhill slide. As their jobs disappeared and their existence grew more precarious, the White House would be hearing them scream, “I know what I told you, why didn’t you ignore me?”
Fortunately, it is not a binary question. There is a middle road to be taken, and it is all the more attractive in that it provides justice. It will also claim some victims.
Some of the Wall Street malefactors will have to take the medicine prescribed by the unfettered free market that they praise so fulsomely. That is, they will have to be allowed to fail and liquidate, or be broken into more reasonably governed entities. We also need to recognize that we cannot save this entire industry, particularly with its significant proportion of basket cases. Sacrificial wolves are in order.
So, how do we decide which are allowed to fail and which can be rehabilitated? The best sources of information to guide those decisions will come from their books and our knowledge of history. Those patients who are connected to IV feeds that are gushing onto the floor through an open artery are not good candidates for salvation. Then there are those who could possibly be saved, but their salvation will simply demand too much in what must be considered to be finite resources.
Those institutions which have a history of acting as poor corporate citizens must have that consideration marked down against them, as well. That poor citizenship is characterized by a resistance to reform and governance, engagement in criminal and fraudulent behaviors, a resistance to using bailout funds as they are intended to be used by the taxpayers offering them, and a poor expectation of being set on a sound and responsible fiscal course.
Some of these sacrificial wolves are large enough to leave a considerable vacuum in their wake, which is the basis of their being deemed “too big to fail”. Those considerations must be set aside, and indeed, in combination with other symptoms of non-viability, should be an argument to let them go. Their function in the market must be picked up by other institutions, and that must be a part of the mandate that those institutions receive from the taxpayers along with their bailout funds.
It may seem like a long way to go for political cover, but political cover is the least of the benefits accruing from it. Allowing the worst in the field to go under increases the size of the pool of available bailout funds relative to the institutions that remain. The remaining institutions’ greater strength and improved expectations of success would multiply the efficacy of the bailout funds applied to them.
Of course, an opportunity to witness another’s misfortune and think how, “there but for the grace of God go I”, can only strengthen the survivors’ resolve to do better, and make them more amenable to repairing the credit markets that they have been holding out on, lest they be the next one on the pyre. Lastly, if we can avoid arbitrary decisions, the procedure will be just, and will be seen as being just by those who have been footing the bill.
The window of time for conducting this triage is close and brief if we are to avoid throwing good money after bad on a number of these lost causes. The investment of significant resources makes it more difficult to let them go, so decisions must be made before these investments grow too large.
We can save some of these institutions from themselves. The ones that go by the wayside will not be missed for very long. Let’s make our first priority our society and our nation. It is clear that Wall Street’s priorities have been elsewhere.
Culling the sick and the weak makes for a healthier herd. We must take a lesson from nature as we deal with these beasts.