Will Goldman Sachs be the next Freddie Mac?

Paul Krugman seems to think so in his column in today's NYT. Wait, Krugman must be nuts, didn't Goldman Sachs just report billions of dollars in second quarter profits? But here's the rub: Goldman was one of many financial services companies that was deemed too big to fail last fall. No changes in financial regulation are on the horizon; Congress is focusing on cap-and-trade and health insurance instead and the President seems happy with that. Compensation practices have not changed, as Krugman notes

The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.

So what will happen? Bankers will take even bigger risks, one day they will find they have placed their bets on the wrong side, and guess who is left holding the bag? Krugman's take: the government needs to insist on tighter regulations as long as the Goldman Sachs and its ilk are in effect wards of the state. An alternative view I would like to see someone flesh out -- if these institutions are too big to fail, maybe we should bust them up so they aren't too big?