THE ENDGAME.

Fedwatcher Tim Duy makes some good points:

I have to imagine the employees of Bear Sterns and Lehman Brothers are currently thinking that they clearly did not take on enough risk over the past several years. Lehman employees, in particular, were fed into the moral hazard grinder that was operational for a scant two days. How unfortunate. Which leads me to my most significant concern about Fed policy over the past year – the inconsistency. Facilitate the liquidation of Bear Sterns by backstopping $29 billion of questionable assets. Then, recognizing the moral hazard created by that move, let Lehman collapse. Then, recognizing the consequences of vanquishing moral hazard, effectively purchasing AIG. At this point, the endgame should be clear to policymakers – a taxpayer bailout. The bad assets need to be consolidated and eliminated. Congress needs to be working on a mechanism to make this happen, a new RTC. Any Congressional action needs to include a reevaluation of the state of financial regulation...I think we are now all realizing where we are headed. We are moving into the endgame, when Congress socializes the losses after privatizing the gains.

You should read his whole post. But the conclusion illuminates a basic unfairness we should recognize: The resolution to the past decade or so of rocketing wealth in the finance sector will be that all those guys remain jaw-droppingly rich while taxpayers pay off hundreds of billions of their bad bets. Making it all the more galling, the very traders who forced us into this mess will escape not only the bill, but they'll be exempted from even paying their portion of the tax bill. The the tax loophole that allows employees of private investment companies to classify their income as "capital gains" and thus pay 15% in taxes rather than 35% remains unclosed. Maybe one of Congress's policy responses should be to muster some nerve and equalize tax treatment. Forget moral hazard: I'd settle for some simple fairness. If they're going to rely on the tax system as an insurance plan, there's no reason they should be exempted from buying in.