Why the WSJ's Holman Jenkins Jr. is Mad as a Hatter
Holman Jenkins Jr. dives down the rabbit hole today in an op-ed arguing that the near collapse of the banking industry proves not that the financial system needs fixing, but that it's working exactly as planned.
Under this strange revisionism, "moral hazard" is just the cost of doing business. Only Utopian long-hairs fret about "too big to fail," while TARP is turning into one hell of an investment. And contrary to popular opinion, many of the nation's largest financial institutions were never really in trouble at all -- people just panicked. Jenkins writes:
We're not saying banks didn't make bad loans.... But neither were banks destined to lose fatal amounts of money by holding these assets till maturity granted the stabilizing role of a lender of last resort to make sure a liquidity panic didn't metastasize into an economy-wide solvency meltdown [italics his]....What killed Lehman Brothers? Panic. How about Washington Mutual and IndyMac? Panic. Colonial Bank, Guaranty Bank? Panic, panic. Oh, and how about the living dead, like AIG (AIG) and Citigroup (C)? Breathe, people, breathe!In a panic, remember, the problem isn't really bank size or interconnectedness -- it's behavior, a fear that the public is one headline away from trying to yank its money out of the financial system.
Jenkins says none of these companies were ever in serious danger. And that's because of the "stabilizing role of a lender of last resort," otherwise known as you and me. As long as Uncle Sam, the patron saint of perpetual handouts, is there to stabilize Wall Street with his checkbook, it's all good.
Insurance facilitates risk-taking -- that's its job. And governments for two centuries have deemed it proper to write the financial system a liquidity insurance policy in times of panic. This won't change, at least until the Rapture descends to cure the inherent risks of fractional reserve banking.Am I feverish, or is Jenkins implying that government bailouts of the financial industry are embedded in the natural order of things? But never mind that -- just follow the lady, because he's getting around to identifying the real culprit:
It's the crisis everywhere of the welfare state, of promises made that are beyond the power of governments to keep -- beginning perhaps with sad sacks like Greece but ending with Japan and the U.S., which remain central to the global economy.Ah, the welfare state. Scourge of bumptious individualists everywhere. Thumbscrew to the Invisible Hand. Predictably, that's Jenkins's real target. And to make his case it's necessary to transform the financial meltdown into a negative of itself, to turn black into white.
In this picture, bailouts aren't a problem, they're a permanent solution sanctioned by God and country. Speculative bubbles aren't dangerous, they're a safety belt. The enemy isn't interlocking banks, but depositors prone to losing their nerve. The welfare state didn't save Wall Street from itself, but from -- here's a neat trick -- the state itself. On the other side of the looking-glass, crisis is stability.
The Cheshire Cat said it best -- we're all mad here.
Image from Wikimedia Commons.