Noted in a column on the Bear Stearns bailout:
When large market players – like Bear Stearns of today – find themselves in dire straits, the Federal Reserve can face a bit of a conundrum in the court of public opinion. If the Fed decides to bail out a bank or hedge fund whose failure could mean much wider market crises, the public can grow frustrated that only the largest institutions have the privilege of avoiding failure by tapping government funds.
And yet, if the Fed hews to strict free-market philosophy – allowing Darwin to cull weak institutions from the market’s ranks – the decision to stand pat could create a public back-lash should the markets end up tanking while the Fed kept its hands folded.
My view would be that the strict free-market stance should be followed precisely because of the unfairness of the alternative. All other things being equal, if it is taken as a given that the State exists, and that they will bail out SOMEBODY, a billionaire bank should get one approximately, oh…when El-P joins the military. People saying “DO SOMETHING!!” should not be surprised when things get worse, as they’re effectively calling for them to.
That said, the characterization given by the author isn’t quite accurate in the first place. The average citizen isn’t going to associate further economic drain-circling with a failure to rescue investment bankers. Unfortunately, neither will most associate current conditions with government interference, thanks to the prevailing common wisdom that we have a free market, thus anything bad happening gets used as proof that free markets don’t work. If it were up to me, the following question would become inconveniently frequent from our lips:
“How can a financial institution be ‘too big to fail’ without first having been too big to succeed?”