NATCHITOCHES, La., October 13, 2011—Mitt Romney’s answer to a question on the TARP won’t raise his stock with Tea Party conservatives. During an exchange with Bloomberg’s Julianna Goldman at Tuesday’s GOP debate, Romney said, “My experience tells me that we were on the precipice, and we could have had a complete meltdown of our entire financial system, wiping out all the savings of the American people. So action had to be taken.”
Romney is right. The financial system was on the precipice. Our financial system and currency rest on nothing more solid than public confidence. Our money is money because we all believe it is, and our financial system functions because we trust it to function. The government had little choice but to step in and throw taxpayer money at Wall Street banks. The alternative was for taxpayer money to vanish in a cloud of smoke and lost dreams.
But the Tea Party is also right. Wall Street should have no claim on the public purse, no bank should be “too big to fail,” and if bankers know that they can count on taxpayers to bail them out, they’ll run roughshod over the public and continue to put the economy at risk.
The problem is moral hazard: If they’re insured against risk, financiers have little incentive to avoid it. If their bad behavior has no consequences for them, they’ll continue to behave badly.
The banks had to be rescued. The alternative was disaster not just for the banks, but for you, me, and everyone whose wealth and livelihood depend on a functioning banking sector. Moral hazard was a problem for the future; financial meltdown was unfolding in the present. But the possibility of that type of rescue in the future should either be eliminated, or made so hideously costly to finance professionals that they will do everything in their power to avoid it. The moral hazard created by TARP has to be undone.
How that might be done is a subject for a much longer treatise, but the risks of banking have to fall squarely on the shoulders of bankers, hedge fund managers, of everyone who makes decisions in the financial sector.
That “everyone” includes you and me. We’re in the habit of thinking that our investments should be protected, but investment is risky. High rates of return reflect high risk. We have a right to expect the financial sector to operate honestly or to be regulated into a semblance of honesty, but we have no right to expect our investments to do well. If we expect the government to protect our home values, our retirement funds, or our stock portfolios, we’re trying to play the same game of no down-side risk that investment bankers played.
A president who won’t do anything necessary to protect the economy isn’t fit for the office. TARP should never have been necessary, but it was necessary, and we should do whatever it takes to make it never happen again.
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