The debate over Neil Barofsky’s book has taken a turn into a broader debate over bailing out Wall Street at the expense of Main Street, which is both the right conversation to have and also kind of a dismissal of the main argument. Matt Yglesias tries to referee this debate by fitting it into this paradigm, for example:

Team Tim would say that they’re trying to create a well-capitalized banking system in order to bolster the broader economy. Team Neil counters that the broader economy would be better-served by a policy that imposed steep losses on banks and instead repaired household balance sheets. Beneath all the anger and accusations and counter-accusations is a fairly wonky policy disagreement about the relative importance of household balance sheets versus the credit channel to laying the preconditions for growth.

I don’t think it’s right to totally go beneath that anger and accusations and counter-accusations. Treasury admittedly designed a program that they pretended would help homeowners, and instead it allowed banks to trap those homeowners and spread out their inevitable demise. This deception is actually central to the debate, and demolishes the credibility of the side that perpetrated it. The counter-factual that Team Tim would bring up is that this was sadly necessary to ensure a well-capitalized banking system. It was necessary to keep a few servicers in business, but on the rest nothing could be further from the truth. First of all banks don’t even own the majority of these loans. Investors would win with principal reductions and loan modifications in net present value-positive situations. They’ve all said it publicly. The broken servicer model has led to a series of wrong-way incentives that have allocated most all of the losses from the housing bubble on homeowners, in ways that were economically damaging to everyone involved. That’s with a well-capitalized or uncapitalized or shadow capitalized banking system in place.

Yglesias concludes with a cop-out that none of this matters anyway because monetary policy could have solved the problem and is pre-eminent. That enables him to slide away from this debate. I find it far more consequential. Oligarchies of finance create the conditions for economic crises. They lead to rampant inequality, which makes systems vulnerable. These same financial elites, what’s more, have the ear of technocratic monetary policymakers, so the whole dodge is sort of academic and not realistic. It’s because of runaway finance that monetary policymakers aren’t doing their job, in large measure.

And the best way to end runaway financial oligarchs, simply put, is to end their reign. You can say that this “breakup of the banks” would be costly. We’ve been through four years of a no-growth recovery, with millions of people out of work, and to a significant degree a zombie financial system is the cause. Why is this worth saving? If the repercussions are depressed growth until their power and influence is broken, you have to factor that into the calculation.

It’s not just that we should have done more for homeowners, as Kevin Drum points out. It’s that the people who said they were doing more for homeowners demonstrably lied about it, and are still lying about it. That should not be explained away with the wave of a hand. Similarly, this idea that better policies on the banks were unattainable and anybody who said different was necessarily playing on the other team is such a sanctimonious argument I can barely begin to express my opposition.

Treasury had a choice when the banks were sick and in need of help. They had significant leverage. They chose to bail them out for trillions and watch them commit the largest consumer fraud in the history of the United States. This is not a wonky argument about household balance sheets. It’s about the rule of law and the meaning of a promise. It so happens that I agree that we’re in a balance sheet recession and that policies to deleverage would ultimately have been better for the greater economy. But that’s not the only way to arrive at the same conclusion. And the fact that Republicans may be worse doesn’t absolve this Treasury Department of blame.