I've been thinking about a question that is related to the "zero structural budget deficit" policy goal and the principle of Fairness. It is also related to many of the world's key disputed values (see above):
What is the economic cost of the Main Street versus Wall Street story, whereby the "greedy incompetent bankers" benefitted disproportionately from the 2009 bailouts, at the cost of the "American taxpayer"?
An even more sinister version of the story has the bankers (e.g. Goldman Sachs) stealing the money by manipulating the Executive and Legislative branches of the US government. Regardless of which version, there are a lot of people who believe, rightly or wrongly, that something very large, very unfair, and very un-American happened last year. I am one of them.
But I'm also seeing it from the other side of the lens, since I work at a bulge-bracket, too-big-to-fail, bailed-out, bonus-giving (maybe?), investment bank. I know that the people I work with think they are doing "God's work", but I also know that the road to hell is paved with good intentions.
So I'm conflicted. I feel guilty. I gave more to charitable organizations in December. I'm thinking of donating blood for the first time.
However, that's not the problem. The problem is the millions of people who don't believe that their world is as fair as it used to be (Are you one, too?). We are tempted to become bitter, jaded, and to adopt a defeatist attitude towards the situation. We assume there's nothing we can do, because the forces that determine our fate are now outside of our control.
Economically, this could have some unfortunate implications:
1. We may no longer feel a social obligation to pay our debts - "the world turned against us", so there's no dishonor in filing for bankruptcy and/or walking away from an underwater mortgage. The very idea of this terrifies the investment community, as it should.
2. We might just give up - unfairness can have a huge impact on a person's work ethic. In fact, Robert Schiller and George Akerlof devote an entire chapter of their book, Animal Spirits, to examining the effect of perceived unfairness in African-American communities in this country. The idea is that simply the fact that the people in these communities believe, rightly or wrongly, that they don't have a chance to "make it" leads to terrible consequences: high underemployment, lower life expectancy, extreme income inequality.
These, by the way, are also some features of failed states around the world, where corruption and unfairness is expected.
The "expectation of unfairness" that causes these problems in many African-American communities is an example of the concept of tribal stigma, "or affiliation with a specific nationality, religion, or race that constitute a deviation from the normative" (e.g. women in sub-Saharan Africa, Japanese-Americans during WWII, slaves).
Racism, sexism, religious persecution, xenophobia, genocide, and homophobia can all be attributed to tribal stigma, and there is significant evidence that being relegated to a stigmatized outgroup can have negative psychological implications (e.g. the perceived unfairness in the African-American example).
How is this related to economics? Fairness is the bedrock of American capitalism: the idea that if you work hard you can improve your lot in life, regardless of your origins. Breaking that contract, creating the expectation for unfairness, damages the credibility of the American ideal.
And yet, this is exactly what we've done with the 2009 bailouts. (I'm not saying, by the way, that we shouldn't have bailed out the banks. I'm among those who believe we would have had a second Great Depression if we'd let all the banks fail at once.) The way that the bailouts were done has created a lasting expectation of unfairness in this country, and I fear there will be lasting negative economic implications from that unless we remove the moral hazard doom loop that we created by giving the banks very favorable, unconditional bailouts.
The more I think about, the only way I see to fix the "expectation of unfairness" problem is to prove to the American public that it won't happen the next time around. I see two ways to do this:
1) Break up the largest banks into pieces that everyone believes are "small enough to fail", or
2) Successfully "unwind" a too-big-to-fail bank with the newfangled yet-to-be-explained "resolution authority" that is currently being proposed (Citigroup would be a great test)
Can you guess which one I think would be more effective? By the way, when I say "successfully" use resolution authority, I mean without a financial panic and with no liability to the taxpayer. Those should be preconditions to any fiscally-responsible regulatory package. The former looks far less risky to me.
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