This morning Paul Krugman observes that a bailout of financial institutions on the part of the federal government to mitigate the financial crisis is inevitable:
Itâ€™s true that Henry Paulson, the current Treasury secretary, still says that any proposal to use taxpayersâ€™ money to help resolve the crisis is a â€œnon-starter.â€ But thatâ€™s about as credible as all of his previous pronouncements on the financial situation.
So hereâ€™s the question we really should be asking: When the feds do bail out the financial system, what will they do to ensure that they arenâ€™t also bailing out the people who got us into this mess?
Letâ€™s talk about why a bailout is inevitable.
Dr. Krugman goes on to catalog the bad assumptions, decisions, and conduct that have led to the present contretemps. He concludes with a point with which I agree completely:
As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.
to which I can only add that, if a private institution is too big and powerful for the government to allow it to fail, then the institution is too big and powerful for the government to allow it to exist. Make no mistake: these mega-institutions only exist on sufferance. They are not the natural products of the market.
BTW, a lot of the shareholders and bondholders he’s saying should take a bath are institutional investors, particularly pension funds. As I’ve been saying for nearly 30 years the scandal of the 2010’s will be the default of pension funds.