Keeping up appearances

Various sensible people (Atrios, Brad DeLong) have been commenting lately to the effect that it makes no sense to bail out banks in a way that preserves shareholder value; the economically rational thing to do is what was done with the Saving and Loan mess, and nationalize the bank, wiping out the shareholders in the process, fix it up, and sell it.

I would go so far as to say that it makes no sense to preserve the institutional structure of any major American bank; pretty much every major US bank has been doing something between theft and counterfeiting to keep their declared profits high, and leaving those responsible for that systematic and deliberate abuse of the fractional reserve banking system running a bank strikes me as culpably idiotic.

However, the "don't wipe out the shareholders" response—the proposed massive transfer of tax revenue to bank shareholders—makes perfect sense, in that it's defending the class status of those bank shareholders.

When Atrios says there's zero reason that shareholders of large banks are special creatures who deserve to be bailed out he's wrong, or, at least, wrong from the point of view of the folks proposing that massive transfer of tax revenue to private individuals. He's entirely right from a general economic perspective. That's not the perspective the folks involved are using.

Because the banks have lied about value they've destroyed a lot of actual value while having the market value of their mis-labelled collateral drop to something like an accurate valuation. This is making a lot of accounting-money vanish. If more vanishes, lots of people who are currently rich, and thus upper class, will stop being rich, and fall out of their class identity.

Since to a first approximation all the legislators share that class identity, they are highly sensitive to the plight of their fellows (and probably some of those fellows are fellow legislators, grimly aware that you can't run for national office in the US if you're not part of that class) and don't really see why bank shareholders should not be preserved as members of the upper class.

That's the benign interpretation; it's probably wrong. The more probably correct interpretation is that a substantial majority of the legislators truly believe that the proper function of the government is to secure existing wealth, and that by rescuing the shareholders of the major banks they are doing precisely what they ought to be doing.

This is, after all, the view of government that's been pushed ever since the Regan Revolution; government is there to secure and defend existing wealth and the global economic order that produces that wealth.

I'm going to stop there; the rant about why that's a terrible idea goes somewhere else.

I will say that it's going to be a very strong indicator of the worth of the Obama Presidency, whether or not the banks and bank shareholders are burned right down to the ground and replaced with something able to serve the general prosperity.