No More Bailouts

The Problem: Bailouts for Bankers and Cronies; Debts, Taxes and Lost Savings for Workers

An old problem is about to get worse. For years, Wall Street banks and their top employees have thrived because of a perverse deal with our government: they take massive risks and engage in iffy and even corrupt deals that fatten their wallets. Then, when they get into trouble, the government, Fed and taxpayers bail them out. Now volatile crypto currencies are being welcomed to free ride on the regulated financial system. In addition, the large AI-related firms, which currently account for a huge share of total equity market valuations, and have become large issuers of debt, may be in bubble territory. Here we go again. Worse, the intimate involvement of Trump, his family, and his cronies in both industries makes bailouts much more likely.

Bailouts: A Democratic and Republican Equal-Opportunity Problem

The bailout problem has grown under both Republican and Democratic administrations. During the 2008 crisis, the government and Fed used as much as $29 trillion dollars to rescue the financial system. The failure of the FTX crypto exchange at the end of 2022 contributed to the failure of two banks, Silvergate and Signature, that served the crypto industry. The follow-on failure of Silicon Valley Bank, which served venture capital firms, forced regulators to ultimately guarantee uninsured deposits at those banks (and implicitly all other banks) to stop an incipient run on mid-sized banks. In the aftermath of 2008, The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) attempted to address this bailout habit by strengthening financial regulations and limiting the ability of the Federal Reserve to bailout individual companies. But Wall Street lobbying resulted in a Dodd-Frank riddled with loopholes. Now, Trump’s administration is eviscerating what’s left of the financial regulatory structure entirely.

Game Changer: No More Bailouts – Protect Workers, Businesses and Communities, Not the Bankers and Grifters

Congress should mandate that failing individual AI or crypto firms, and their creditors, should go through bankruptcy, with no support using Congressionally allocated funds, tariff receipts, or Federal Reserve lender of last resort funds. Regulatory extortion to force banks to fund crypto, AI or other crony entities, should be investigated and prosecuted. Bank licenses for crypto-related entities should be terminated. Stablecoins, crypto and related derivatives should be excluded from bank balance sheets, and from use of the banking payments system. Presidential immunity from criminal prosecution should be eliminated.

In the event of an emerging system-wide financial crisis resulting from disruptions in crypto or AI, the Federal Reserve should engage in standard compensatory macroeconomic actions such as lowering interest rates to support overall macroeconomic activities and liquidity support to ensure that the payments systems operate normally. If necessary to protect workers, businesses and communities, the Fed and the government should establish lending facilities to provide funds to states and municipalities, small businesses and employees to avoid community, business and workers’ collateral damage from a financial meltdown. The government should learn by the successes and failures of similar such actions during the Covid pandemic to fine-tune these support systems.

Regulated banks that fail because of exposure to crypto or AI should be resolved in standard fashion by the Federal Deposit Insurance Corporation (FDIC) and the Fed, according to current law.

To protect the economy in the medium to long run, the government and Federal Reserve should adopt the financial stability regulations identified by the Game Changers financial stability proposals.

Rationale and Feasibility: Crypto and Conflicted AI Bailouts Encourage Socially Unproductive Economic Activities, Widen Wealth Gaps, and Generate Anti-Government Political Resentment

Economists of all stripes agree that government bailouts of financial actors engaging in excessively risky or corrupt practices have highly negative impacts: they encourage dangerous economic behaviors; worsen income and wealth inequality by using the power of government and taxpayer money to subsidize the wealthiest members of society; protect economic activities that have high private rewards for financiers but that do little for workers and communities.

The case against bailouts is even stronger in the case of crypto and conflicted AI investments. There is no positive case for the usefulness of crypto. On the contrary: crypto is a tool for hiding bribes to political officials; for laundering ill-gotten funds from drug trafficking, arms running and other illegal activities; a vehicle for tax evasion; and a tool for exploiting naïve investors who buy crypto only to find that they have the rug pulled out from under them when the crypto values collapse. Furthermore, with crypto and AI, the corruption and self-dealing of the Trump family and allies mean that bailouts would support government corruption and undermine democracy.

The Game Changer policies identified here – nearly all of them already in the Federal Reserve’s and government’s toolkit – would end these costly bailouts while protecting legitimate businesses, workers and communities from the fall-out of crypto or AI induced financial crises. Such policies are not only feasible, but they are necessary if we are going to protect workers, businesses and communities, and strengthen our democracy.