It has been two years since the demise of Lehman Brothers and the ensuing rescue of incumbents in the U.S. financial sector. Many Americans are still furious that their government helped the rich and politically connected few while leaving the rest hung out to dry. The government bailed out Wall Street financiers who live in the top tenth of the top hundredth of the income distribution. Meanwhile, almost one quarter of families with mortgages remains stuck with negative equity in their homes.

Of course, the bailout was necessary: After Lehman collapsed the world economy quickly buckled, proving that the government would not have done ordinary Americans any favors if it had left other financial institutions to go down as well. But there can be no doubt that welfare for the well-to-do is corrosive to American capitalism and democracy. In an interview on 60 Minutes last December, President Obama protested that he “did not run for office to [bail] out a bunch of fat cat bankers on Wall Street.” Yet bail them out is what he did.

The Treasury likes to say that it has made money on many of its rescues. It points out that its direct injections of equity into financial institutions, conducted under the $700 billion Troubled Asset Relief Program (TARP), will end up costing taxpayers remarkably little—according to Treasury Secretary Tim Geithner, less than $50 billion, although this estimate is contingent on the Treasury’s ability to sell its remaining stakes in AIG, Citigroup and General Motors at valuations that many private sector analysts consider to be wishful. Geithner has called TARP “one of the most effective emergency programs in financial history”, while Steve Rattner, the Wall Streeter who oversaw the Obama Administration’s rescue of the auto sector, affirms that, “without exaggeration, this legislation [establishing TARP] did more to keep America’s financial system—and therefore its economy—functioning than any passed since the 1930s.” The message is that, rather than being denounced as politically corrosive, the bailouts should be celebrated as a bargain—a fantastically cheap victory against the threat of a second Great Depression.

Geithner and Rattner may be partially correct. The government is likely to resell its stake in Citigroup, for example, for more than it paid in the depths of the crisis. But the omens are less good on its other big gambles. AIG has raised nearly $37 billion from selling foreign operations, but that will not be sufficient to repay the more than $180 billion that it received from the American taxpayer. Meanwhile, despite the triumphalism that accompanied the recent IPO of General Motors, the government only sold half its stake. To break even, the remainder would have to be sold at an average price more...