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Hedging Risk

Authors: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics, and Matthew Klein
January - February 2011
The American Interest

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It has been two years since the demise of Lehman Brothers and the ensuing rescue of incumbents in the U.S. financial sector. Many Americans are still furious that their government helped the rich and politically connected few while leaving the rest hung out to dry. The government bailed out Wall Street financiers who live in the top tenth of the top hundredth of the income distribution. Meanwhile, almost one quarter of families with mortgages remains stuck with negative equity in their homes.

Of course, the bailout was necessary: After Lehman collapsed the world economy quickly buckled, proving that the government would not have done ordinary Americans any favors if it had left other financial institutions to go down as well. But there can be no doubt that welfare for the well-to-do is corrosive to American capitalism and democracy. In an interview on 60 Minutes last December, President Obama protested that he "did not run for office to [bail] out a bunch of fat cat bankers on Wall Street." Yet bail them out is what he did.

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