The Government, the Private Sector, Banker Bail-out Edition

Of the posts I’ve written, one of my absolute favorites had this lengthy title: The Government, the Private Sector, Chocolate Chip Cookies, and a Flag-Waving Member of the Local Chapter of Kiwanis – an Anecdote. That post looks at one way that the private sector creates inefficiencies in the government by forcing the government to protect itself from cheating, and then blames the government for having to deal with those inefficiencies.

But of course, there are other ways for the private sector to create inefficiencies in the government, and then blame the government for being inefficient.

Calculated Risk notes that bankers are looking for a bail-out from Uncle Sam. Yves Smith expands on the theme.

Now, anyone who has taken an introductory microeconomics class can recognize that this sort of a bail-out creates a moral hazard – the next time around, banks know they can take massive risks because if anything goes wrong, there’s a good chance Uncle Sam will bail them out. Heck, they might have behaved very differently in recent years, and hence avoided the current mess, but for the message sent by the various bail-outs of the past.

But in addition to creating the moral hazard problem, and in addition to saddling the taxpayer with the bill (but not, I might add, the earlier profits – there will be no bail-out of the profits that occurred in the run-up to this point), there is the additional problem I mentioned, which is that this process makes the US government more inefficient, by saddling it with the mess and and a designed-on-the-fly method of bail-out.

Now, I’m willing to bet that it won’t be long that one of heads of one of these bailed out banks is going to be in the public eye, lecturing us about efficiency of the private sector – just like the cookie maker in earlier post. He will be proud, he will be patriotic, and he will be convincing to many. But what he won’t say, and what he won’t admit even to himself, is that our system would be a lot more efficient, a lot closer to something resembling the capitalist structure he so lovingly describes, if people like him were made to suffer the consequences of their actions. And the government would be run a lot better too.