Excessive debt plagues the global economy today. The entire world gorged on easy money during the credit boom and now we need to decide who bears the losses from the debt-binge. The answer is both morally and economically simple: creditors and banks that make ill-advised loans must face the pain of bad loans. This simple answer means they will exercise more caution in future lending decisions and that they get only the protection they bargained-for. If they wanted the maximum safety they should have lent to the U.S. government or Japan or Germany. Instead, they chased higher-yields, and made subprime real estate loans or lent to Greece or made risky bets on derivatives.
Under no circumstances should they be permitted to have their cake and eat it too--they cannot pocket the profits of risky banking and lending and now obtain unbargained-for guarantees from governments around the world. This is the fundamental economic injustice in the world today because while 99% of the innocent taxpayers bear the costs of the debt bubble, the 1% who profited most continue to control our financial system and continue to enjoy windfall profits from the bailouts arranged by their pals in government (in the US that means both major parties). Worse yet, much of the bailout money ended up in the pockets of the very managers that caused the crisis. The government expended trillions to bailout financial elites, including extended stealth bailouts, that continue through today. Indeed, the government even bailed the bankers out of jail and now intends to bail them out of their ongoing foreclosure fraud.
Meanwhile, in Europe the banks remain under-capitalized. Another round of bailouts is looming over there, and it threatens to engulf the US banks. The Europeans preach austerity to their people at the same time they seek more money for their banks from the US-supported IMF. If the European banks go down, the US banks will follow according to a recent US government report showing that our banks have at least $2 trillion in total European exposure. As Paul Krugman notes today the Europeans probably can only continue to argue about the placement of deck chairs on the Titanic, not save their banks. Meltdown looms and it may be worse than Lehman.
Instead of using US taxpayer money to bailout global banks, Occupy Wall Street should demand that the government bailout US citizens. Student loan debt soared and jobs contracted since the crisis and the government should reduce loan balances and defer payment in exchange for community service. Foreclosed homes should be available for rent by current occupants so that the supply of real estate for sale contracts and poverty is reduced. Finally, and most importantly, the US needs a jobs program (including massive grants for education and retraining) to rescue citizens from a financial crisis that is not of their making.
As for the financial sector, they must be allowed to fail this time, finally. All the senior managers should lose their jobs, be sued for gross negligence and face criminal penalties (in many cases, at least). Their employment agreements and deferred compensation would be terminated along with the rights of all unsecured creditors. This is the approach of the new Dodd-Frank law, if the administration follows that approach. Notably, this process includes debt destruction--that is, creditors will take losses and be forced to write-off debts which will facilitate deleveraging.
As many economists pointed out early on, rescuing the banks will not spur new lending. Only a bank with competent management and a clean balance sheet can do that. So, the government should seek to move good assets into new banks with competent managers as quickly as possibly. This will create conditions for renewed growth.
Occupy Wall Street should focus on this: Bailout people not banks!