A must read from an unlikely source

Eliot Spitzer isn't so dumb after all. Read his recent piece for Slate. It is well-reasoned, evenhanded, and shows an imagination that you wouldn't expect from a politican. Unlike most of the pieces that I've read concerning the litany of bailouts U.S. taxpayers are financing, Spitzer's aaks if we're merely rebuilding flawed institutions in the same manner and hoping that the same thing doesn't happen again. In the following paragraphs, he neatly sums up the existential crisis threatening the U.S. financial system.

This long-term change frames the question we should be asking ourselves: What are we getting for the trillions of dollars in rescue funds? If we are merely extending a fatally flawed status quo, we should invest those dollars elsewhere. Nobody disputes that radical action was needed to forestall total collapse. But we are creating the significant systemic risk not just of rewarding imprudent behavior by private actors but of preventing, through bailouts and subsidies, the process of creative destruction that capitalism depends on.

A more sensible approach would focus not just on rescuing pre-existing financial institutions but, instead, on creating a structure for more contained and competitive ones. For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed. The failure shows in gargantuan losses, bloated overhead, enormous inefficiencies, dramatic and outsized risk taken to generate returns large enough to justify the scale of the organizations, ethical abuses in cross-marketing in violation of fiduciary obligations, and now the need for major taxpayer-financed capital support for virtually every major financial institution.

I don't think that there has ever been a more eloquent refutation of the financial supermarket every written.