The Establishment

Tyler Cowan has a fantastic post in response to the theory - advanced in many corners on the Left and Right - that Goldman Sachs and other Too Big To Fail banks exercise outsize power in the US government. Uh, yeah, GS is so powerful they just got sued by the SEC in a maneuver widely viewed as a coordinated political attack on the finance industry by the feds: Do Big Banks Control Our Government?

There's a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep the whole show up and running. The perception at least is that our country requires the dollar as a reserve currency, requires New York City as a major banking center with major banks, and requires fully credible governmental guarantees behind every Treasury auction and requires liquid financial markets more generally. Furthermore the international trade presence of the United States (supposedly) requires the federal government to strongly ally with major commercial interests, just as our government sides with Hollywood in trade and intellectual property disputes. To abandon banks is to send a broader message that we are in commercial and political decline and disarray, and that is hardly an acceptable way to proceed, at least not according to the standards of the real Washington consensus.

In other words, it's our government deciding to assemble a cooperative ruling coalition - which includes banks -- at the heart of its fiscal core. It's our government deciding who belongs to this coalition and who does not, mostly for reasons of political expediency and also a perception - correct or not -- of what is best for the welfare of American voters. If we don't in this year "get tough" with banking regulation, it's because our government itself doesn't want to, not because of some stubborn recalcitrant Republicans.

That's something that very few people understand. But, it's key to understanding why the bailouts were passed with overwhelming support from mainstream Democrats and moderate Republicans (and against overwhelming opposition from conservatives, progressives, and - d'oh! - the American public). If you are in favor of Big Government, then you need the big banks to help fund it. Even if you are a Hollywood-approved liberal who likes to talk tough about "corporations," the fact is that it was these people - the Party of the Common Man and not the Party of Big Business - that approved the bailouts.

For all their talk about "protecting Main Street," the bigger concern was protecting Pennsylvania Avenue.