Commentary

You Can’t Have It Both Ways Mr. Krugman

In his column last Thursday, Paul Krugman wrote: “Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us? First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.” The ironic thing is that Goldman essentially was saved because of government bailouts on the belief that the collapse of Goldman would be bad for America. Bailouts that Krugman supported.

You can’t have it both ways Mr. Krugman.

When it comes to corporate bonuses, they might be excessive, they might not. But if they are detrimental to solvency, then a firm should suffer the consequences of that. Otherwise, who are we to say how much a banker should get as bonus. Who is to say $700,000 is too much for doing a good job? Was it excessive for Roy Halladay—Toronto Blue Jays pitching ace—to get a $125,000 bonus just for being selected to the all-star game? Red Sox superstar Josh Beckett only got $50,000 and he has a better record, on a better team. Chad Billingsley, one of the best pitches for the MLB leading Dodgers, didn’t get a dime for making the all-star team. But it doesn’t matter because players agree to contracts. Teams agree to contracts. And if it doesn’t work out, teams and players understand they bear responsibility for their business choices.

In terms of how much money Goldman is making, why does Mr. Krugman know what is acceptable and what is over the top? Sure they’ve made a huge amount of money, but it is relative to everything else. Why does “progressive” economics constantly seek equality by making everyone poor instead of striving for a system where everyone can become rich. There is no reason to criticize Goldman’s profits.

But wait, there is more. In the column Krugman also says:

…growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers.

Again, it might be true that the way Wall Street has done business over the past 30 years is unsustainable. It might not be true. The strength of America is largely due to the financial innovations of Wall Street, something we don’t give it enough credit for any more. But it is all besides the point if the government comes in to save the system when it starts falling apart. If it is really so bad, then let it fail. That’s the only way real change ever happens. It is the market’s way of self-correcting problems.

Without the bailouts, both TARP and support from Fed facilities, and the rescue of firms like AIG, then Goldman might have failed. That would have been the natural order of things. Krugman says so himself:

What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong. You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.

Again, there is distinct irony that Krugman is complaining about the too interconnected to fail guarantee. It was this that led to the problems in the first place. It was this promise that let businesses take excessive risk. And it is this promise that is being written into law through the regulation overhaul process that could be the most detrimental to stable growth in the future.

Of course, Mr. Krugman doesn’t see it that way. In one breath he says the government guarantee for financial institution liabilities is a bad thing. But when he takes the next breath to talk about regulation reform, he ignores that issue completely, instead focusing on consumer protections:

This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers. If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road.

If we would have let Wall Street take responsibility for its actions then a lot of people would have lost money. The recession (already months underway by September 2008) would have continued. There probably would have been a spike in unemployment. But how would that have been different than what happen anyway? Sure it would have taken time for the market to recover and sort itself out. But at least the system would rebuild on a fresh foundation. The stimulus and bailouts passed only perpetuated problems in place before. And if we had left the invisible hand alone, Mr. Krugman wouldn’t have to complain today.

This is not a new revelation, we’ve been saying it for months. It just so happens that, now, those who were pro-bailout are getting a taste of what the taxpayer support structure can result in. (For a more eloquent explanation of the Goldman quandary, see Jon Stewart’s take.)

Anthony Randazzo

Anthony Randazzo is a senior fellow at Reason Foundation, a nonprofit think tank advancing free minds and free markets.