The Coming Bank Bailout Backlash

Boycott Citigroup . . .
Pay Higher Taxes?

How do ordinary citizens disgusted by serial government bailouts of Wall Street register their displeasure?

Assume that you are not prepared to join the ranks of the posse comitatus, and mail in your 1040 next April with just an expletive scrawled in crayon at the top, no payment enclosed.

Further assume that you do not have the ear of anyone in a position of authority, either on Wall Street or in Washington, and therefore are powerless to stop extremely good money -- trillions of money -- from being thrown after merely very good money.

Finally, assume that you have neither the inclination nor the aptitude (let alone the time!) to become a latter-day Howard Jarvis (of Proposition 11 fame in 1970's California); a Frank Capra-style Mr. Smith, bent on cleaning up a corrupt system; or even a Howard Beale ("Network"), decrying its ills.

What's left?

The one course of action remaining to the "little guy" would seem to be to vote with your consumerist feet. In other words: commit acts of financial civil disobedience.

Financial Civil Disobedience

Purely hypothetically, say the object of your displeasure is Citigroup. (Unfortunately, AIG has fewer retail lines of business.)

You could cut up your Citigroup credit card and replace it with one issued by another bank; withdraw your (diminishing) savings from Citigroup branches and open up an account across the street; and vow not to apply for a mortgage from Citigroup (not that you'd get one, anyways).

After all, it's supposedly a free country, and a free marketplace. What better way to punish an especially irresponsible financial scofflaw than to pull all of your business, modest as it may be?

Unfortunately, there are at least three problems with such an approach.

One. It might boomerang.

Imagine that such financial civil disobedience actually caught on, and Citigroup's business began to suffer as a result (the term's relative).

Citigroup would lose even more money, bringing it close to collapse (again). To prevent that, the government might very well feel compelled to inject yet more of your money into Citigroup to save it.

Perversely, the greater the public's resolve to kill Citigroup . . . the more expensive the government rescue.

"To Tell The Truth" -- Banking Version

Two. No good alternatives.

What if the bank across the street is just as bad? That is, what if every bank did what Citigroup did, and is now getting federal bailout money?

Imagine for a moment that you run a bank, and all your competitors who screwed up are getting cheap -- or free -- no-strings-attached, government money. Wouldn't you grab some, too, even if your bank was run conservatively (and profitably)?

Given that you compete with the "bailee-banks" for loans, deposits, etc., your competitive position would suffer if you didn't.

Now imagine that the government purposely obscured the distinction between "bad banks" and "good banks," by forcing the latter to accept bailout money. (Unfortunately, you don't need to imagine this -- it just happened.)

The result would be a surreal game of "To Tell the Truth," in which millions of ordinary consumers-cum contestants have to figure out which banks are genuinely virtuous, and which are impostors.

Three. Financial temptation/co-option, or, "cutting off your nose to spite your face."

The reason that Fannie Mae and Freddie Mac, so-called government sponsored entities ("GSE"s), had such spectacular access to cheap money was that its lenders believed -- correctly, it turned out -- that the federal government guaranteed their loans.

Now, the government is not only guaranteeing a big chunk of Citigroup's debt -- it's a shareholder! To protect its investment (and Citigroup's market share), the government logically should now make sure that Citigroup's rates on everything from mortgages to car loans are competitive. Perhaps too competitive.

Calling Howard Jarvis

If 30 year mortgages are available from Citigroup for 5%, and Hometown Bank for 5 1/2%, which are you going to choose? Ditto for CD's yielding 4% vs. only 3% at the competition. H-e-l-l-o . . . Citigroup!

These conundrums (and more) are exactly why government shouldn't decide which financial institutions should live and which should die, and why doing so leads to absurd and potentially disastrous outcomes.

In a market economy, the marketplace -- and the millions of consumers who comprise it -- make those decisions.

Sadly, the expression, "you can run, but you can't hide" now describes the futility of trying to shield your wallet -- and your descendants' -- from a federal government bent on ever-more expensive and wrongheaded bailouts.