NATURAL SELECTION

The recent discovery of a remarkably well-preserved, mummified baby mammoth reminded me of the gargantuan banks, insurance companies, and auto companies that are slowly dragging the balance sheet of the U.S. Government toward the bottom of the sea.

I am reminded how the mammoths, once the largest land mammals to walk the earth, are no more. There is debate as to what brought about the end of the reign of the woolly mammoth, but one fact is clear: whatever stresses befell this massive animal, the species could not flee or adapt quickly enough and perished in its entirety.

What parallels exist between the extinction of the mammoth and the taxpayer support of Citigroup? For one, Citigroup is a bank that is doomed to failure by its over-burdened corporate structure that permits far too many inefficiencies to creep in at all levels. Secondly, the massive size of Citi, and the sheer weight of its balance sheet, makes it impossible for the company to rapidly adjust to the finanical tsunami by, for example, merging with another bank, or spinning off business units, and thereby effectively getting to higher ground.

Not only is it preferable to let outsized banks like Citigroup collapse under their own weight, it is absolutely necessary in order to preserve the ecological balance for all other banks and financial institutions. While Citi is kept on life support, it continues, like a zombie mammoth, to trample the shoots of smaller, more agile banks that are looking to advance their own business models. The taxpayer funding of these privately-held banks is also setting a precedent of government intervention into private enterprise that will encourage the same kind of consolidation and risk-taking that led to this crisis.

In order to restore balance in the system, the public must begin immediately to extricate itself from the process of nationalization of the financial sector and refuse to re-engage, no matter how scary it gets. At the same time, we must formally establish a hands-off policy with regard to the success or failure of any individual private business enterprise, backed by the force of law if necessary. At the end of the day, the core constitutional obligation of the federal government is to protect us from famine, war and natural disaster. Restoring the central government to its core function, and allowing the free market to heal itself, will preserve the innovation and diversity that is the hallmark of U.S. enterprise.

AMERICAN OLIGARCHS

In the Comment section of today's Financial Times, Martin Wolf wrote about analogies drawn by former IMF Chief Economist Simon Johnson between Russia and the United States. The parallels stem from the outsized political authority wielded by, and public attention paid to, the largest U.S. financial institutions, which he compares to the Russian Oligarchs.

These institutions, deemed "too big to fail", are literally sapping the public dry on the belief that what is good for Wall Street is good for Main Street. And, like the oligarchs in Russia, while these companies and their shareholders represent a tiny percentage of the population of businesses in need of rescue, they are benefiting from almost all the stimulus money.

How could this distinctly undemocratic policy arise in a social democracy such as the United States? In short, because of the corrupting effects of money on the political system. In 2002, the financial sector booked 41% of all corporate profits in America, more than double the long-term average, and a lot of this money flowed to the political parties. By 2008, many politicians had been elected, and many bureaucrats appointed, in no small part as a result of contributions from members of the financial sector.

So, when it started to become apparent that the outsized financial profits had been made on the backs of ridiculously outsized bets that were quickly coming home to roost, the heads of the major banks were able to rally President Bush and his Treasury Secretary, former Goldman CEO Hank Paulson, to sell a terrifying scenario to Congress and the Fed of a financial domino effect in which the major banks and the global credit markets collapse, leading to runs on banks, a deflationary spiral, and general chaos.

Whether this scenario was accurate or not is anybody's guess (I personally do not believe in the "too big to fail" thesis and would not have voted to approve TARP), but trillions of dollars in public money have been spent and it is not clear that bank balance sheets and credit markets are showing any lasting signs of improvement.

The good news is that the ability of the financial sector to wield the same public policy authority is set to wane: relative wages in the financial sector fell from a 1933 peak of over 1.6 (the ratio of financial wages to non-farm private wages) to near parity in 1980. As of last year, the ratio was over 1.7, so if history is a guide we can expect non-financial wages (and political authority) to grow relative to financial wages for many decades to come.

The bad news, of course, is that the U.S. dollar and to the spending ability of the U.S. taxpayer have been dealt a lasting and awful blow.