For four years, the Bush White House, the Obama White House, and the Federal Reserve have allowed banks to pretend that their bad mortgage debt is worth a lot more than it is.
Their theory is that the economy can’t be healthy unless the banks are healthy. So everyone pretends that the banks are healthy.
The economy can’t grow, though, under a blanket of bad bubble-era private-sector debt.
And years of low-to-no growth hurt . . . guess who?
The banks, as seen in their plunging stock values in the past two weeks.
Guess what else hurts banks?
The government’s policy of borrowing hundreds of billions of dollars directly, not to ease a transition into a healthier economy via temporary safety-net spending and infrastructure investment, but to allow state and local governments to pretend that their unaffordable public-sector employee benefits are affordable without the revenue from a financial and housing bubble (that fantasy is what a big chunk of “stimulus” stimulated).
The more money Washington wastes, the less it will have for future bank bailouts.
Investors know this.
The financial industry can’t escape paying for its bubble-era mistakes. But Washington has decided to go the long way in letting the free markets work, and has taken everyone else along for the ride.
— Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.