Now that we own their sponsor, U.S. taxpayers should get a free Man U jersey with income tax payment. Or we should be able to have Rooney punch a banker. Either way.

Does listening to pundits discuss he financial crisis make your head spin, leaving you both angry and confused? Do you know that something in the discussion is just not right... in an Orwellian sense? Do you feel like you're watching the aftermath of the largest theft in the history of the world?

If so, you're not alone... and you're right to feel this way.

In the early nineties, a pair of economists classified the behavior that led to this debacle, described the environment that would make such behavior likely, and suggested that it would happen again as the natural result of that environment.

Sixteen years ago, two economists published a research paper with a delightfully simple title: “Looting.”

The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that . . .  investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

[Emphasis added.] Sound familiar?

On certain low-documentation loan programs, such as stated income/stated asset (SISA) loans, income and assets are simply stated on the loan application. On other loan programs, such as no income/no asset (NINA) loans, no income and assets are given on the loan application form. These loan programs open the door for unethical behavior by unscrupulous borrowers and lenders.

These loan programs are designed for borrowers who have a hard time producing income and asset verifying documents, such as prior tax returns, or who have untraditional sources of income, such as tips, or a personal business. These loans are called liar loans because the SISA or NINA features open the door for abuse when borrowers or their mortgage brokers or loan officers overstate income and/or assets in order to qualify the borrower for a larger mortgage.

For more on how these loans were abused by lenders, see this Washington Post article from 2007. (And if you have more time, devote an hour to listen to "The Giant Pool of Money," a fantastic report by This American Life.)

So what about the idea that a lot of smart people just made innocent mistakes, or that this is a systemic problem that no one could have predicted? Looting is not just an error in judgment, but knowing, self-interested behavior.

The term that’s used to describe this general problem, of course, is moral hazard. When people are protected from the consequences of risky behavior, they behave in a pretty risky fashion. Bankers can make long-shot investments, knowing that they will keep the profits if they succeed, while the taxpayers will cover the losses.

[The distinction between moral hazard and looting is an important one.]

With moral hazard, bankers are making real wagers. If those wagers pay off, the government has no role in the transaction. With looting, the government’s involvement is crucial to the whole enterprise.

Knowing that their financial institutions were too big too fail, bankers made choices that were only rational in an environment where personal gains were all that mattered, and where a government bailout was seen as inevitable. The government was the escape route, the getaway driver... and the thieves got away scot free.

We should be angry. We've been robbed.

Maybe some sacrificed chickens will fix the economy...

East Coast Economics has posted a dramatic visual explaining just how much borrowing our government has been doing over the last few months.

Check out the following which shows the $$$ amount borrowed by US banks from the Fed through Dec 2007; the spike marks the Savings & Loan Crisis at the end of the 1980s with borrowing maxing out at $8b. 

[Then scroll down and] take a look at the [second] chart.  It is the same graph as above, but [at a different scale, panned out, and] updated through the beginning of November ‘08.

So where is all of this borrowed money going? Paul Krugman delves into the details of the ongoing policy debate about how to deal with failing banks.

Old-fashioned voodoo economics - the belief in tax-cut magic - has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans. 

But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.

[Krugman sets up an excellent hypo detailing how this would work -- well worth reading.] 

Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word - nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover.

Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.

Unfortunately, the price of this retreat into superstition may be high. I hope I'm wrong, but I suspect that taxpayers are about to get another raw deal - and that we're about to get another financial rescue plan that fails to do the job.

[Both articles via Robot Wisdom, image by Olly Moss.]