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Paul Krugman Reveals Why Congress' Wall Street Giveaway Is a Catastrophe in the Making

December 15, 2014 in Blogs

By Janet Allon, AlterNet

The financial industry bought a Congress and is reaping great returns already.


“The Masters of the Universe, it turns out, are a bunch of whiners,” Paul Krugman writes in his Monday column decrying Congress's recent Wall Street giveaway. “But they’re whiners with war chests, and now they’ve bought themselves a Congress.” 

There was a time, not so very long ago when the securities and investment industry, unlike other industries like coal, gave large donations to both parties more or less equally, Krugman recounts. But all that changed in 2010, when “financial tycoons went ballistic over the president’s suggestion that some bankers helped cause the financial crisis.” Specifically, they were mad about the Dodd-Frank reform, which limited some of their high-flying financial antics. Ever since then, Wall Street has been in an “Obama rage,” and invested heavily in Republican candidates.

Last week, they got a good return on that investment, Krugman writes, and a totally indefensible one with one of the provisions in the budget bill. “The incoming congressional majority has revealed its agenda — and it’s all about rewarding bad actors,” Krugman writes.

He helpfully explains the provision:

One of the goals of financial reform was to stop banks from taking big risks with depositors’ money. Why? Well, bank deposits are insured against loss, and this creates a well-known problem of “moral hazard”: If banks are free to gamble, they can play a game of heads we win, tails the taxpayers lose. That’s what happened after savings-and-loan institutions were deregulated in the 1980s, and promptly ran wild.

Dodd-Frank tried to limit this kind of moral hazard in various ways, including a rule barring insured institutions from dealing in exotic securities, the kind that played such a big role in the financial crisis. And that’s the rule that has just been rolled back.

Yupp. Indefensible.

Still, on the rapidly dimming bright side, Krugman does not think this provision in itself is the death-blow to financial reform. The crisis of 2008 was caused more by uninsured financial institutions like Lehman Brothers and A.I.G. “The really important parts of reform involve consumer protection …read more

Source: ALTERNET

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