Occupy Wall Street reminds me of a doctor who sees a patient with a broken arm, decides that both arms are broken, and proceeds to amputate them: The diagnosis is half right, and the cure may be worse than the disease.
Start with the diagnosis. "Us against them" always makes for good theater. But is the big problem with the American economy really the top one percent versus the rest of us? Are we being victimized by the fat cats? The data seems undeniable. The share of income going to the top one percent has risen dramatically over the last 40 years. If the top one percent have more, surely the rest of us have less, right? But as the writer P.J. O'Rourke has said, wealth is not a pizza. If we're sharing a pie, and you get a bigger piece, that does not mean that I have less to eat. It depends on what happens to the size of the pizza. Ten percent of an enormous pizza is more filling than all of a tiny one.
The protesters are right about one thing: Washington has been coddling Wall Street. But they have missed the most important way that Wall Street lives off the rest of us. Programs like the Troubled Asset Relief Program of 2008 are red herrings. TARP did send $700 billion to Wall Street, but most of it has been paid back.
There is a much more important, albeit quieter, favor Washington has been performing for Wall Street over the last 25 years: When large financial institutions get into trouble, policymakers make sure that their creditors receive 100 cents on the dollar.
The economist Milton Friedman liked to point out that capitalism is a profit-and-loss system. Profits encourage risk-taking. Losses encourage prudence, which is just as important. Over the last 25 years, however, government policy has been laissez-faire when it comes to profits, and socialist when it comes to creditor losses. That is a very destructive cocktail. It has encouraged imprudent risk-taking financed