When the Obama administration decided we’d roll over during the Wall Street bailout — that we wouldn’t follow the ancient rule “when in Rome do as the Romans do” and negotiate a deal as tough as Wall Street players would — we set ourselves up for a world of pain. And not just because it encouraged Wall Street to keep finding new and innovative ways to hose us. By not smacking them down, Krugman writes, the government undermined any efforts to save the rest of the economy.
Brad DeLong says that the loss of public trust due to the kid-gloves treatment of bankers has raised the probability of another Great Depression, because the public won’t support another round of bailouts even if it becomes desperately necessary. I agree — but I think the bigger cost is that we’ve greatly increased the chance of a Japanese-style lost decade, with I would now give roughly even odds of happening. Why? Because bank-friendly policies have squandered public trust in all government action: try talking to the general public about stimulus, and it’s all confounded in their minds with the deeply unpopular bailouts.
