The Bailout is Not About Fat Cats on Wall Street

I recently tried to explain the importance of the financial crisis to a bailout-skeptical friend, who is a medical doctor, with these words:

Let me put it this way: how would you feel if you woke up tomorrow and found you couldn't use your credit or debit card and couldn't access the funds in your bank account in any way? Or consider how long your hospital could function if it could not tap into its lines of credit or access its funds. Just go and ask your hospital CFO. More generally, the real side of the economy--the side where goods and service get produced--would come to a grinding halt if credit stopped flowing. This has become a real concern lately.

I think this is a point that many people miss. Our economy is so incredibly dependent on a smooth functioning financial system that its absence would devastate our day-to-day lives. Yet many people fail to appreciate this dependency and thus find it hard see the importance of stabilizing the financial system. What they see instead is the bailing out of Wall Street Fat Cats.

Now one can question the details of the proposed bailout, but that is a different issue. One can also raise questions about moral hazard, but at this juncture any moral hazard concerns are dwarfed by the threat of financial system meltdown. This intervention is all about maintaining our financial system. Bloomberg's John Berry argues this very point:

In the days since Treasury Secretary Henry Paulson released his $700 billion plan to restore stability to financial markets, the essential point has been lost in all the complaints about bailing out banks and greedy executives.

Why should such institutions be helped when ordinary American taxpayers -- who have managed their own finances prudently and are being battered by a loss of wealth and jobs -- have to pick up the tab?

Because there's no choice.

The fuss about the purpose of the plan and the sense that it was really just intended to help a bunch of fat cats had reached a point that Federal Reserve Chairman Ben S. Bernanke, testifying yesterday before the Senate Banking Committee, stressed that he was a college professor, had never worked on Wall Street and had no connection to it. His only concern, he said, was the future of the economy.

The credit markets are in a ``fragile condition'' and not functioning properly, Bernanke said. If no action is taken, more jobs will be lost, more houses foreclosed and the economy will contract because credit won't be available.

``There will be significant adverse consequences for the average person in the United States,'' Bernanke said.

Now with all that said, the prospect of a $1 trillion dollar deficit next year and its potential impact on the dollar and future financing costs also is troubling. One can only hope that Bill Gross and others are correct in their assessment that Main Street may actually profit from the bailout.