Well, Paul, What Did You Expect With the Bailouts?

Poor Paul Krugman. Here we had the government stepping in to "fix" the mess in the financial markets, and this is a government that is run by his fellow Progressives. Yet, Krugman sees doom. Hmmm.

In "The Secret of the Banks' Success" on his blog, Krugman writes:

Back in early 2009 I was skeptical about the ability of major banks to recapitalize themselves out of profits. I was wrong, it turns out. Here’s why: Financial-industry profits have soared, probably because banks that can borrow money cheaply — because they have an implicit guarantee from the feds — are more or less guaranteed money machines unless they do something stupid; and gross stupidity has been placed temporarily on hold.

This has been good for the TARP, which won’t lose much money.

Beyond that, however, I find this ominous. We got into this mess because we had an over-financialized economy, with finance making a share of profits out of all proportion to its actual economic contribution. And now it’s baaaack.

If Krugman were to talk to the Austrian Economists -- a group he holds in total contempt -- he might find that the better road would have been for there to be no TARP at all.

The very best thing that could have happened to Wall Street, which was exposed by the free market for being over-leveraged and its executives overpaid, would have been to let some people besides Lehman go out of business. As Peter Schiff asked in a great speech last year, "Why do we need Goldman Sachs?" Indeed, why do we need a lot of the very players with the Ivy League pedigrees who brought down our economy, yet made a bundle in the process?

Instead, we now have the same people even more politically entrenched than before, who understand that beyond all else, as long as they give political contributions and agree to appear at a D.C. show trial or two, they have free reign for as long as they want. It's a great deal for them, but lousy for everyone else.

Krugman seems to understand that point instinctively, but because he apparently does not believe in the established "Capture Theory" of Regulation, he is not going to understand why the regulatory regime that he wants exists only in his imagination.