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:

It’s true that Henry Paulson, the current Treasury secretary, still says that any proposal to use taxpayers’ money to help resolve the crisis is a “non-starter.” But that’s about as credible as all of his previous pronouncements on the financial situation.

So here’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 aren’t also bailing out the people who got us into this mess?

Let’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.

5 comments… add one
  • Dave, even if the PBGC didn’t exist there’s no way the federal government would let the pension funds get hosed. In light of what’s happening to people’s home values and likely stagnating 401(k)’s, not to mention every other investment that’s not a commodity, there is no way that the Feds will allow people to think there’s any risk to their pension funds too.

  • Dave — good post — I like your last point and I am riffing off of that at the ‘Hog. I don’t think the pension funds will be allowed to fail, or at least fail too badly, as the politics of the Boomers entering their highest propensity to vote years as a massive cohort will encourage that they receive the smallest possible cramdown even at the expense of screwing everyone else.

  • Not all funds are covered by the PBGC and the PBGC is, basically, insolvent as it is.

    I think there’s a political battle ahead on this subject. We’ve got a bad fiscal situation as it is and I believe it will get worse.

  • Dave — going back to a previous point on a post I made a couple of days ago, that fight on who gets crammed down and to what extent is going to be the mother of all budget battles and every $200,000,000,000 annual discretionary expenditure will be at risk as I can imagine the campaign commercials now

    Deep ominous voice — Congressman X voted to strip hardworking people of their pensions, and kick cute cookie making grandmas out of their homes

    Close-up of Congressman X — We need to be fiscally responsible

    Back to deep ominous voice — Congressman X voted to approve another $200,000,000,000 for Iraq and has voted for 1 TRILLION DOLLARS for Iraq…. does he share our values…..

  • That argument might be made at the district level but it won’t be made at the national level for the simple reason that any foreseeable president is going to leave 60,000-80,000 of our troops in Iraq. Read the fine print on both Sen. Clinton’s plan and Sen. Obama’s plan. They plan to remove combat brigades and leave forces for training, force protection, etc. That’s 60,000-80,000 troops.

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