Socialism Watch, Part II

Wed, 22 Apr 2009 12:49:18 +0000

I am reluctantly drawn back into this discussion about labels. Did we ever think it would get to the point where I am defending investment banks against some other entity in the economy? Treasury Secretary Geithner apparently has decided that bailout money was an offer they couldn't refuse:

Geithner said his primary responsibility is to consider the well-being of the entire financial system, rather than the health of individual companies. The federal government can reject requests from banks that want to repay the money.

"The critical thing we care about is whether the system, as a whole, is in a position where it has the capacity to support the credit that recovery requires," he said, making his first appearance before a congressional oversight panel on the government's financial-rescue program. "That's the ultimate test."

What else would you call insisting on an ownership stake to support the government's perception of the greater good? <!--break-->If the concern is, as Secretary Geithner states, and if the policy lever is to be infusions of government capital, then the government capital can flow to any bank in the economy in order to support that lending. It doesn't have to be crammed into these financial institutions which are unwilling to keep it.

So I don't believe this refusal to accept repayment is about "supporting the credit that recovery requires." My view is that the fixation on these firms continues to be the federal government's concern that it will be on the hook if the economic decline continues and these firms become insolvent. Given the government's past dealings with such firms, that is a reasonable concern to have. But the way to address the concern is by letting the firms repay the bailout funds if they desire and committing to not intervene later to save them. The government then can pursue its larger goals of capital adequacy through voluntary transactions or tighter regulations on all firms.