The Morality of the Bailout

I work with a young man on his writing whose goal is to attend Harvard. He has undertaken a project to write a book on the role of morality in economics and society. This has really forced me to focus my thinking so that I can help him focus.

There are some very basic questions that need to be asked today, now that we are more than 5 years past an existential crisis and still mired in economic mediocrity. The first and most important question is not whether we are better off, but what have we learned?

Our standard of living has been extremely adversely affected and yet we have legislative gridlock in Washington and nothing has substantially changed on Wall Street.  We battle over ideologies instead of solutions. We watch people get massacred senselessly and we let the leading advocate of gun violence retard the reform process. With results like these it is hard to remain optimistic.

Just how big was the government bailout in 2008? The number that was tossed around when TARP was created was $500 billion, which is a sizable sum. But according to an article from April 2011 in American Thinker, the actual amount of money provided to financial institutions to keep them afloat was $1.2 trillion.

With all that money being provided and with most of it paid back by this point, and considering the economic situation in which we find ourselves, you again need to ask, what have we learned?

We watched as bailed out companies gave their executives exorbitant bonuses and severance packages. We watched as arrogant chief executives like Jamie Dimon made jokes about being overregulated and we have watched as not one person who perpetrated this crisis has gone to jail.

We have learned nothing. We have sat back and taken it on the chin. So the next question would have to be, where would we be now if we had let those institutions fail and instead used the $1.2 trillion to provide relief to the middle class families whose lives were ruined by the unpunished sins of Wall St. traders?

Yes, I am sure there would have been some major economic fallout if we had let AIG, Standard and Poors, Citigroup and Morgan Stanley, among others,  go under. But would the effect have been as long lasting as it has been if that money had been given to relieve the debt load of middle class families who had gotten in over their heads?

The conservative argument is that people should be responsible for themselves and if they get in trouble then they should get themselves out. That philosophy has largely been applied to the people who lost their homes and their livelihoods but has been ignored when it comes to the big financial institutions who were responsible for the crisis in the first place.

Which is more immoral? To bail out the people who made bad decisions for themselves and their families, or to bail out the big financial companies who pulled the strings that led people to make these bad decisions in the first place? The middle class has been held accountable while the financial institutions have not. Forcing the financial institutions to pay fines without admitting any wrong doing is not justice, is not moral. It’s basically putting a band aid on a bleeding system and ignoring the source of the wound.

We have become desensitized to immorality. We have made heroes out of the superrich without bothering to examine their character. We celebrate them when they devise new ways to make things more opaque and allow them to conceal their activities.

If the $1.2 trillion had been given to families, we might be experiencing greater economic expansion and investment in the kind of job creation we need to keep the middle class stable. You don’t get job creation by keeping big financial institutions in business that fight to keep conducting themselves in the same manner which created the crisis in the first place.

The next time the financial institutions put us in this position will we act the same way? Those institutions operate under the assumption that we will. Maybe if they were held accountable, they might decide to act in a fashion that benefits all of the stakeholders and further intervention would become unnecessary.

In any case, it cannot be said unequivocally that we did the right thing, considering the results we have gotten. It is time to ask whether we would have been better off taking a different course of action so that those responsible for the crisis know that there is no guarantee of reward if they give us a repeat performance.