Big Bank Profits and Government Intervention

Zachary Goldfarb had an interesting piece in the Washington Post this week. He writes:

President Obama has called people who work on Wall Street “fat-cat bankers,” and his reelection campaign has sought to harness public frustration with Wall Street. Financial executives retort that the president’s pursuit of financial regulations is punitive and that new rules may be “holding us back.”

But both sides face an inconvenient fact: During Obama’s tenure, Wall Street has roared back, even as the broader economy has struggled.…Wall Street firms — independent companies and the securities-trading arms of banks — are doing even better. They earned more in the first 2¹/ ₂ years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show.…

Behind this turnaround, in significant measure, are government policies that helped the financial sector avert collapse and then gave financial firms huge benefits on the path to recovery. For example, the federal government investedhundreds of billions of taxpayer dollars in banks — low-cost money that the firms used for high-yielding investments on which they made big profits.

Later, Goldfarb was interviewed on NPR. Near the end of the interview, he says:

But the president has also refrained from taking some of the toughest actions that some economists and outside analysts would like him to have taken. For example, forcing banks or attempting to force banks to forgive the debts of homeowners, or partially forgive the debts of homeowners, or forcing banks to break up into pieces and end, definitively, the too-big-to-fail problem.

So in a sense, Obama has tried to strike a middle ground, harnessing frustration, sharing in frustration of the public regarding the financial sector, but not taking the fundamental actions that would radically restructure the financial industry and perhaps cause there to be more fairness across the country when it comes to the disparate treatment of Wall Street and the rest of the country.

In my view, a “middle ground” would be to a) not bail out banks, and b) not break them up or force them to forgive debts. Instead, the conventional wisdom holds that the moderate position is to a) bail out private firms and then b) force their hands.