Too big to fail is too big to allow, reads one hand-lettered sign on the east side of Zuccotti Park overlooking lower Broadway. Good point. As a few protesters (not all) understand, the problem with the banks isnt that they exist, but that theyre isolated from the consistent rule of law. The bizarre irony, then, is that five weeks in, Zuccotti Parks live-in campers are behaving more and more like the banks against which they are railing. A few dozen banks and other financial institutions—at minimum—are too big to fail. Back in October 2008, thenTreasury secretary Hank Paulson and Fed chief Ben Bernanke were afraid that letting big firms, such as AIG and Bank of America, go bankrupt would cause too much chaos and pain for the economic and financial systems. The government stepped in and rescued them.
The problem remains. Just last week, three European nations bailed out Dexia Bank, a global municipal lender. In the New York Timess Dealbook, Jesse Eisinger wrote that, while Western governments probably wont hesitate to wipe out equity holders in failed financial institutions, . . . they will do everything they can to protect [derivatives] counterparties so that the system doesnt collapse. If hes right, that means speculators and derivatives are benefiting from free government insurance, courtesy of the people who will pay for future financial crises—whether thats taxpayers or people thrown out of work or both.
Nobody knows what will happen in any individual case because theres no consistent rule of law to protect free markets, only the unpredictable rule of people. In particular, Republicans, who are supposed to support free markets, should spend more of their waking hours worrying about how this crisis came about and how theyd fix it. But last week, GOP presidential front-runner Mitt Romney, for one, made clear that he doesnt think much about the too-big-to-fail disaster.
By now, the Zuccotti squatters have become too big to fail, too. New York mayor Michael Bloomberg worries that enforcing the rule of law at Zuccotti Park would cause too much chaos and pain. This time, the pain wouldnt come in the form of economic injury in the form of years worth of double-digit unemployment, but in potential injury to protesters as well as to police, bad publicity for the city, and lawsuits. And just as Paulson and his successor at Treasury, Timothy Geithner, have treated financial institutions randomly, Bloombergs approach is similarly unpredictable: one day, hes going to force the protesters to leave on a firm deadline; a few hours later, he backtracks, citing mysterious, unseen forces.
Coddling banks has had unfortunate unintended consequences. Thanks to its government subsidy, the financial industry is likely still bigger than it needs to be—to the detriment of other industries trying to compete for capital and talent. Coddling squatters will also have negative unintended consequences. New York City is home to dozens of parks, public and private. People live and work just yards away from them. Now, other would-be squatters can observe whats going on at Zuccotti and draw their own conclusions. Whats to stop homeless people, for example, from pitching heated tents in Central Park? Such a situation would be awkward, at best, for the mayor, because many Zuccotti protesters are white, and many chronically homeless people are not. If the mayor were to evict squatters from some spaces and not others, New York might face lawsuits based on unequal treatment. In addition, some New York City public spaces are indoors. This past Saturday, Bank of America closed its indoor park in its headquarters near Bryant Park—no big mystery why. But this closure, another random action, penalizes the public.
In both cases, whom should people blame for governments failure to enforce the law? The protesters make a common mistake in blaming the banks. But the banks are simply exploiting Washingtons weakness. The protesters should hold elected officials, not bank executives, accountable. Likewise, the protesters arent to blame for Bloombergs failure to enforce public order and private-property rights. The protesters are taking advantage of the mayor because hes letting them. Its understandable that Occupy Wall Street garners public sympathy (and donations). People feel disenfranchised, and they just want somebody, somewhere, to do something. But the nation cant combat the failure to uphold the rule of law with more of the same.
Heres a simple prescription: banks shouldnt be too big to fail, and people shouldnt live in public spaces.
Nicole Gelinas, a City Journal contributing editor and the Searle Freedom Trust Fellow at the Manhattan Institute, is the author of After the Fall: Saving Capitalism from Wall Street—and Washington.