As Goldman Gloats, What Does It Matter For Us?

Goldman Sachs New York i i

Goldman Sachs headquarters, in New York. The Wall Street firm again showed its trading prowess, helping it earn more than $3 billion in the third quarter. Mark Lennihan/AP hide caption

itoggle caption Mark Lennihan/AP
Goldman Sachs New York

Goldman Sachs headquarters, in New York. The Wall Street firm again showed its trading prowess, helping it earn more than $3 billion in the third quarter.

Mark Lennihan/AP

Should we care about Goldman's profits and compensation? It's pretty gauche when your take-home pay is millions of dollars while some of your neighbors can't find work. But is it wrong? Is it something those of us on the outside should care about?

Normally, I'd say it's nobody's business. What people get paid is best left to the marketplace.

But Goldman Sachs is different because those of us on the outside are really on the inside. Goldman Sachs was propped up with our money. Not the money it took directly from the government and paid back. The money that AIG gave it that really came from the taxpayer.

Goldman Sachs being proud of its performance this year is like the Harlem Globetrotters bragging that they went undefeated. It's not really a normal competition.

Goldman Sachs played the same game as Bear Stearns and Lehman Brothers — they made lousy investments financed with borrowed money. When the assets fell in value, Bear and Lehman died. They were reckless with other people's money.

But Goldman Sachs is still here, Why?

Part of the reason is that maybe it took a little less risk and maybe hedged against that risk a little better. But part of the reason Goldman lives and thrives is that the government bailed out AIG. Almost 13 billion dollars of the money the government sent to AIG went out the door and over to Goldman Sachs. This money included loans and insurance Goldman bought on its bad bets. Some of that insurance turned out to be a bad bet, too. But Goldman didn't bear the cost. The taxpayers did.

Part of the reason Goldman and other Wall Street firms made so many bad bets is they knew they might be rescued. And most of the time, they were.

The rescue of large financial institutions is justified by policymakers as a way to save the system and protect Main Street from a tsunami of financial instability.

Russell Roberts

Russell Roberts is a professor of economics at George Mason University and a research scholar at Stanford University's Hoover Institution. He hosts the weekly podcast EconTalk.org hide caption

itoggle caption

But capitalism is a profit-and-loss system. The profits encourage risk-taking. The losses encourage prudence. If the taxpayer almost always eats the losses for the losers, you don't have capitalism. You have crony capitalism.

The latest rescue of Wall St has taken hundreds of billions of dollars from average Americans and given that money to some of the richest people in human history, people who made bad bets and should have been taking enormous losses. Instead, they've been taken care of. Their triumph makes Bernie Madoff look like a small-time operator.

The key policymakers, Henry Paulson, Ben Bernanke, and Timothy Geithner, have been praised for keeping things afloat. But to what purpose? What's the virtue of saving crony capitalism? Maybe they prevented an even worse recession.

There's no way of knowing. But they have deeply damaged both capitalism and democracy.

We have a financial system that not only rewards cronies and encourages recklessness. It also funnels precious capital into areas like the housing sector instead of into more productive investments.

We have to stop rescuing the reckless. We have to let people who make bad decisions bear the consequences.

Profit and loss. The rest of us live that way. Wall Street can too.

Russell Roberts holds the Smith Chair at the Mercatus Center at George Mason University, where he is also professor of economics. He is a research scholar at Stanford University's Hoover Institution and the host of the weekly podcast EconTalk.org.

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