The Corner

Goldman Sachs Can’t Fix Washington’s Problem — and Ours

Several readers objected to my Saturday post on Goldman Sachs and the government. One of my points was that if people don’t like the fact that Goldman is making tons of money because of an implicit government guarantee, they should blame the government, not Goldman. “Goldman is a player, not a referee, and it cannot change the rules,” I wrote.

“Do you have any evidence to support this proposition?” asked one Corner reader. “I think [people] are angry because the rules were made by ex-Goldmanites and friends of Goldman.”

Wrote another:

At the interagency [government] meeting hosted by the US Treasury [in the fall of 2008] to discuss the AIG bailout, the US Treasury secretary,” then Henry Paulson, “was the former chairman of Goldman. At the meeting there was also a representative of the private sector, the then-current chairman of Goldman. Voila! Goldman gets 100 percent back [on its AIG contracts]. That is how it is done in places like, say, Guatemala.

And a third reader:

I would have a little more sympathy for your argument that GS is just taking advantage of bizarro world rules written by the government … except, as you must surely know …, there is a revolving door between GS and Treasury, the Fed, and a host of other government regulatory agencies that are writing these rules.

Thanks to everyone for writing.

Here is my problem with the idea that Goldman has unfairly used its connections, brains, money, and power to take advantage of the system: People cannot take advantage of you unless you let them.

A financial company cannot take advantage of the government unless government officials — and distracted citizens — let that company do so.

If our system of laws and rules, including financial regulation, is so weak that one company can exploit it in plain sight for years on end, then we have a big problem with government, not with the company in question.

Put another way: What is Goldman supposed to do to fix things? Donate more money to charity? Politely refrain from sending its ex-officials to Washington to staff major agencies?

These purported solutions would not do anything to solve the problem. They would rely on one company’s benevolent restraint of its own perceived outsized power, power unchecked by consistent market discipline.

Government must ensure that such outsized power doesn’t exist in the first place. Washington must enforce reasonable financial regulations — debt limits, etc. — so that markets can discipline themselves without causing economic disaster.

President Obama, Rep. Barney Frank, Sen. Chris Dodd and many others are surely happy to keep the public’s anger on Goldman. Anger directed at Goldman is anger not directed at the government, where it belongs.

To that end, the politicians must have been thrilled to see the New York Times castigate the investment firm yesterday. The Times editorialists wrote:

We’ll give this to [Goldman CEO Lloyd[ Blankfein. On some level, he seems to understand that an apology is in order. … Wall Street, with Goldman as a leader and with regulators in thrall, helped to inflate and profited from a credit bubble that burst and cost tens of millions of Americans their jobs, incomes, savings and home equity. American taxpayers continue to stand behind the bailouts … that have stabilized the financial system, including Goldman, enabling the firm to post blowout profits in 2009 …. Perhaps the biggest continuing prop is that the government clearly considers Goldman too big to fail ….

The Times then dismissed Goldman’s new $500 million charitable initiative as “crumbs from its table,” and offered its own suggestion that the firm make “a multi-billion-dollar gift to the federal Bureau of the Public Debt.”

But whose fault is it that regulators were — and are — “in thrall” to Goldman? Whose fault is it that the government “clearly considers Goldman too big to fail”? (Answer: the government’s, not Goldman’s.)

No private company can fix “too big to fail” — no matter how much money it gives away and to whom. Charitable donations, even to the government, are not a remedy for a broken regulatory system that does not allow for market discipline.

Looking to any one company to ameliorate voluntarily a problem that government created and that government must solve just gives that company more power.

Washington does not need Goldman Sach’s cooperation, goodwill, or donations to fix the regulatory system so that financial companies can operate in a free and fair marketplace.

Washington does need citizens to focus their attention on the real problem, though, rather than on politically useful and potent distractions. 

— Nicole Gelinas, contributing editor to the Manhattan Institute’s City Journal, is author of the forthcoming After the Fall: Saving Capitalism from Wall Street — and Washington.