This raises a difficult question: If these bankers were just acting in their rational self-interest, then are they the only party to blame?
We think not. The underlying problem is that politicians can offer profitable investment opportunities to a few special interests at the expense of the rest of the country.
Our empirical results support the notion that cozy relationships between politicians and bankers are of core concern. We show that banks employing a former government employee were 29 percent more likely to receive bailout funds than banks without such political connections. In addition, politically-connected banks received $3 billion to $6 billion more in TARP funds and they received the money 35 percent sooner than banks without such connections.
Because taxpayers ultimately shoulder the real cost of this cabal between bankers and politicians, the Wall Street protesters are right to complain. But remember: It's not the financial class but rather the political class that has the power to give and take from taxpayers as they see fit. If your bank tries to charge you a monthly debit-card fee, you can always move your business elsewhere. Not so with taxes.
Competition keeps businesses in check. If a product gets too expensive or if its quality deteriorates, you stop buying and go to the competition instead. The feedback is almost instantaneous. There is no equivalent mechanism in the political sphere. Your congressional representative manages to stay in office whether he follows through on his campaign promises or not.
The only real competitive check in politics is competition between states. If taxes are too high in California, you move your business to Texas. The Founding Fathers designed the country as a federal republic, to harness this power of competition between states as a check on government power. Since then, however, states have continuously lost power to the federal government and the competitive check on government excesses has been severely weakened.
Protesters who desire lasting change should move their protests to the National Mall. As long as the federal government has the power to tax and redistribute, lobbying will continue to be a profitable investment. Neither banking regulation nor new campaign finance laws will do much to change that.
Instead of lamenting Wall Street's greed, the protesters should be rallying against the excessive powers of the federal government.
Diana W. Thomas, Benjamin N. Blau and Tyler J. Brough are assistant professors of economics and finance at the Jon M. Huntsman School of Business at Utah State University.