The Addicted Gambler Theory: Bank Bailout Bill As Never-Ending Corporate Welfare

Naomi Klein's latest column in The Nation [1] theorizes that the Wall Street bailout bill was not just a one-time giveaway of $700 billion to financial firms, but the creation of a never-ending river of corporate welfare to banks. She makes a compelling case.

"The Bush version of “partial nationalization” is rigged to turn the U.S. Treasury into a bottomless cash machine for the banks for years to come...The market will now be banking on the fact that the U.S. government won’t let these particular companies fail. If they get themselves into trouble, investors will now assume that the government will keep finding more cash to bail them out, since allowing them to go down would mean losing the initial equity investments, many of them in the billions...This tethering of the public interest to private companies is the real purpose of the bailout plan: Paulson is handing all the companies that are admitted to the program—a number potentially in the thousands—an implicit Treasury Department guarantee."

She's basically making the Addicted Gambler argument here—that the government will allocate money like an out-of-control gambler allocates bets when he's down. If a bet on a bank loses, the government gambler will reflexively bet more taxpayer cash in order to try to bet back to even and prevent losses.

Klein notes that AIG coming back to the federal kitty again and again substantiates her point. I'd say the incentive structure for politicians does, too—no congressional lawmaker who voted for the initial bailout is going to want that bailout to officially result in huge losses, especially after they sold it to America as a potential revenue-generator. And so rather than cutting off failing banks (which would be berated as "helping destabilize the market"), Congress would have a political incentive to keep doubling down.

Klein is a prophet of our age—and her analysis here is spot-on. And though her work can be depressing in its authentic reflection of a sick world, she drops in a little optimism at the end:

"This duplicity is a political opportunity. Whoever wins the election on November 4 will have enormous moral authority. It should be used to call for a freeze on the dispersal of bailout funds—not after the inauguration, but right away. All deals should be renegotiated immediately, this time with the public getting the guarantees. It is risky, of course, to interrupt the bailout process. The market won’t like it. Nothing could be riskier, however, than allowing the Bush gang their parting gift to big business—the gift that will keep on taking."

I might add one more huge risk to doing nothing—the risk of lashing the federal treasury to the prospects of the wildly unstable financial industry. That's what this scheme really does: put our government on the hook for any future banking industry losses. Seems to me that's the way to totally devalue the term "full faith and credit of the United States government," the term that is currently considered the most rock-solid financial commitment in the world.