Potentially one of the biggest problems with our government is that we rarely hear anyone say, "You know what? I think I was wrong."

When we are served mea culpas, it's typically a long time after the fact, and usually after the damage has been done. Alan Greenspan, for example, admitted well after the financial crisis exploded that maybe markets aren't perfectly self-correcting. And then there was Citigroup's (NYSE:C) former CEO, who confessed that repealing Glass-Steagall might not have been such a good idea.

So … what of the massive government bailouts that directed huge chunks of government cheese to U.S. financial institutions, with precious few strings attached?


TARP Assistance


$70 billion

Fannie Mae (NYSE:FNM)

$60 billion

Freddie Mac (NYSE:FRE)

$51 billion


$50 billion

Bank of America (NYSE:BAC)

$45 billion

Source: Pro Publica.

More than dollars and cents
Although the monetary cost of bailing out the financial system was probably less than the hit we would have taken had the system melted down, it seems that worries that the bailout would create horrendous moral-hazard problems are coming true.

The profits being made at "banks" such as Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) so soon after the crisis are absolutely jaw-dropping, as are the bonuses being paid to the folks who work at these places. A lot of the money being thrown around is coming from government handouts that make it a breeze to pull down big bucks in banking.

Worst of all, though, is that where an implicit assumption once existed that the government would swoop in and save the banks if they got in trouble, now we have an explicit guarantee. To make money and score big bonuses, bankers can now chase after any cockamamie scheme they want to in the short run, even if their actions may imperil their banks. After all, Uncle Sam will come to the rescue if anything goes wrong.

Elizabeth Warren, chairwoman of the Congressional oversight panel for the banking bailout, recently railed on this subject:

Think about the business plan now for ... a big bank that has a government guarantee behind it. In effect, they can say to the investors, 'Hey, come invest with me. And I'm gonna take it all to Las Vegas, and I'm gonna bet it on Red 22. And if it comes in, we are rich. And if it doesn't come in, the taxpayers will pay you back.' … This is capitalism in a world in which the government either explicitly or implicitly says, "We will throw as many taxpayers under the bus as we need to, to keep these large financial institutions afloat."

In other words, we may have been "saved" for the time being, but we could also be getting set up to go through the same gut-wrenching scenario again in relatively short order.

Thumb-sucking ends now
Would we have been better off without any bailout at all? That's hard to say for sure at this point. What seems certain, though, is that the bailout should have been structured with much more of an eye toward the consequences of moral hazard.

The legacy of the financial bailout is definitely looking pretty bleak right now. But not all is lost. The government already supplied the carrot for banks, in the form of billions of dollars of bailout money; now it needs to break out the stick.

Thus far, there's been a lot of thumb-sucking over cracking down on banks. Of course, that's no big surprise when you learn that, according to OpenSecrets.org, Goldman, Citigroup, JPMorgan Chase, Morgan Stanley, UBS, Bank of America, and Merrill Lynch made combined political contributions of nearly $28 million during the 2008 election cycle. Is it any wonder that politicians want to avoid derailing that gravy train?

But unless we want to change the country's title from "The United States of America" to "The United Banks of America," we need action now. A good start would be to require banks with access to government backstops and ultra-low-cost borrowing to shed their trading arms. If we're going to subsidize anything, it should be real banking, not financial shenanigans that reward only those on the inside. 

Of course, I think regulations need to go much further than that. But what do you think? Scroll down to the comments section and share your views.

Think these problems make the United States a scary place to invest? Why not check out India, where my Foolish colleague Nathan Parmelee sees a boom coming?

Fool contributor Matt Koppenheffer owns shares of Bank of America but no shares of any of the other companies mentioned. See what Matt's tracking by visiting his CAPS portfolio, or follow him on Twitter @KoppTheFool. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants …