On February 13, Gretchen Morgenson wrote an important article in the New York Times describing post-bailout America. Within, she describes how major financial institutions have become “too politically powerful to fail,” and a Congress that is too weak knee-ed to appropriately tackle the problem of Too Big to Fail.
The article makes two important points: First, that post-bailout the government has now given an implicit guarantee to large financial institutions that is currently unquantifiable and that this implicit guarantee is likely to be dismissed by politicians. The article cites Edward J. Kane, professor of finance at Boston College, who argues that “People talk about systemic risk, but they have no metric of measuring it. If we recognize that obligations are being put on the taxpayer down the line, then they can be controlled and managed.” Second, Morgenson then notes that “Lawmakers interested in re-election have little incentive to be truthful about what implied guarantees of powerful companies will cost the taxpayer. Better to brush it under the rug or pretend the costs don’t exist. Then, when they must be paid, policy makers can argue that it’s an unforeseen emergency and an odious necessity.”
Will we have the political will to come to terms with the realities of post-bailout America?
See: Future Bailouts of America