How deep is the trouble our financial system is in? Way deep.

Here is a very good layman’s summary from a pal in the hedge funds business. Money quote:

The moral hazard of letting the Fed use tax money to protect financial players against loss will not go away because there is no real incentive for it to. It’s an issue we’ll be facing for a long time after the current crisis is resolved. From now on “too big to fail” will become a goal of many financial institutions, and it will be treated as an escape clause for imprudent investment management. Like most government actions, it actually makes the next crisis more likely not less likely.

[I added the visual myself there.]

As every reader of Burton Folsom and the late Bob Sobell knows, there are economic entrepreneurs (get rich by building a better mousetrap) and there are political entrepreneurs (game the sytem by being smarter than the time-serving bureaucrats who write gummint rules — not usually all that difficult). When an economic entrepreneur screws up, his shareholders and employees lose out; when political entrepreneurs screw up, taxpayers lose out, since the whole art of political entrepreneurship is getting the gummint to backstop your losses.

The individual entrepreneurs themselves usually get away with their mansions and yachts pretty much intact. The general public, those employees and shareholders aside, don’t mind this in the case of a true economic entrepreneur. It’s just part of the game. With political entrepreneurs there is much more widespread grumbling, and I’d be shorting Dan Mudd’s dinner invitations about now.

Won’t somebody please dig up some of Andrew Mellon’s DNA and get cloning?

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people …