Don't worry! Now you can get a job at Treasury doing just what you did on Wall Street!

So, why not use the crisis to irradiate and shrink our swollen and cancerous financial sector?

Kenneth Rogoff in The Guardian:

The [Bush + Reid + Pelosi + Frank + Obama + Paulson trillion dollar giveaway] plan's central conceit is that government ingenuity can disentangle the trillion-dollar sub-prime mortgage loan market, even though Wall Street's own rocket scientists have utterly failed to do so. To boot, we have been told that government is so clever that it might even make money on the whole affair. Perhaps, but let's not forget that a lot of very smart people in the financial industry thought the same thing until quite recently. ...

In mid-August, I had the temerity to predict that risks had come home to roost, and that a large US investment bank might soon fail or be forced into a highly distressed merger. Little did I imagine that today, there would be no freestanding investment banks left on Wall Street. Indeed, after years of attracting many of the world's best and brightest into ultra-high paying jobs, collapsing investment banks are now throwing them out left and right. One such victim, a former student, called me the other day and asked, "What am I supposed to do now, get a real job?"

This brings us back to the US treasury's plan to spend hundreds of billions of dollars to unclog the sub-prime mortgage market. The idea is that the US government would serve as buyer of last resort for the junk debt that the private sector has not been able to price. Who, exactly, would the treasury employ to figure all this out? Why, unemployed investment bankers, of course!

Let's ponder this. Investment bankers have been losing their cushy jobs because they could not figure out any convincing way to price distressed mortgage debt. Otherwise, their firms would have been able to tap the trillions of dollars now sitting on the sidelines, held by sovereign wealth funds, private equity groups, hedge funds, and others. Now, working for the taxpayer, these same investment bankers will suddenly come up with the magic pricing formula that has eluded them until now.

Little wonder that academics across the political spectrum have expressed considerable scepticism. True, the treasury would take equity stakes in some firms, so there would be some upside potential. But the main concern centers around the treasury's apparent intention to pay more than double the current market price (20-30 cents on the dollar) on the premise that its success in untangling the mortgage market would make any discount seem like a bargain.

Does such nitpicking fail to recognise the urgency of fixing the financial system? Isn't any plan better than none?

I, for one, am not convinced. Efficient financial systems are supposed to promote growth in the real economy, not impose a huge tax burden. And the US financial sector, in greasing the wheels of the real economy, has been soaking up an astounding 30% of corporate profits and 10% of wages. Thus, unlike in the 1930s, the US faces a hypertrophied financial system. Isn't it possible, then, that rather than causing a Great Depression, significant shrinkage of the financial sector, particularly if facilitated by an improved regulatory structure, might actually enhance efficiency and growth?

It's all about the fees. Just like our "health care" system.