Feb. 10 (Bloomberg) -- There’s only one thing more revolting than watching Wall Street abuse taxpayer dollars: watching Congress bloviate about it.

Our elected representatives are gleeful at the opportunity to fan public outrage at bankers for their excesses -- in part because it deflects attention from their own.

Whether it’s Senator Claire McCaskill, Democrat of Missouri, calling bankers a “bunch of idiots,” or Rhode Island Democratic Senator Sheldon Whitehouse proposing an “oversight court” to restrain Wall Street’s “massive self-indulgences,” Congress is perched on its high horse.

Public anger at Wall Street is both palpable and understandable. It’s also well-deserved.

Yet it would be a mistake for Congress to interpret that anger as a condemnation of capitalism and an endorsement of bigger government. If my e-mail is a reflection of popular sentiment, Americans are angry at Wall Street for gambling with other people’s money (and losing). They are angry at having to pay for the extravagances of others while they lived within their means. And they are angry at a system that privatizes profits and socializes risks.

They like President Barack Obama and want him to succeed. They want increased regulation of the financial sector, especially since they’re on the hook for past mistakes.

That said, the public doesn’t want government calling the shots. They understand -- at least they should -- that prices are a better way of allocating the economy’s scarce resources than government diktat. (If government was good at it, the Soviet Union would be flourishing.)

Public Choices

Government is nothing more than a collection of individuals acting in their own -- yes, their own -- self-interest, in much the same way that Wall Street does. The only difference, according to advocates of public choice theory, is that governments make public, not private, choices: They choose for us, in other words.

And we aren’t free to reject those choices. Whereas transactions in the private sector are voluntary, the government coerces us (threat of imprisonment) to pay for goods and services via taxes.

Politicians don’t earn a profit in the strict business sense for the services they deliver. Instead they monetize their connections, if not while they’re in Congress -- passing laws that benefit favored constituencies in exchange for campaign contributions -- then after they leave (see Daschle, Tom).

It is not my intention to exonerate Wall Street for its role in sinking the financial system. Nor do I wish to excuse the behavior of banks on the dole.

Bad Taste

Wall Street has always had a deaf ear when it comes to what passes for acceptable behavior. In bad times, the deafness is even more glaring. Client retreats at high-end resorts, million- dollar office renovations, corporate jets shuttling board members across the country: Even before these activities were a matter of public interest (and taxpayer dollars), they were a manifestation of bad taste.

Still there’s something disconcerting, even comical, about politicians trying to cap compensation while “making a bunch of people feel better by beating up on rich people,” says Jim Bianco, president of Bianco Research in Chicago. “There’s a mechanism for correcting the excesses. It’s called the stock price and the board of directors.”

If you want to punish Wall Street, Bianco says, that’s how to do it. Under normal circumstances, when stock prices get too low relative to companies’ expected earnings, investors step in to buy.

Wanted: Private Capital

Not now, Bianco says. “Private money will come back when it knows it can have a say in running a company,” not when there’s a good chance the government will swoop in and take it over.

Here’s where government’s best intentions to make things better have made them worse.

“A necessary condition to attract private capital back is a consistent and predictable strategy by the government,” writes Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago Booth School of Business, in a commentary for the Center for Economic Policy Research. “Without it any other effort is in vain.”

The title of Zingales’s 2003 book, “Saving Capitalism from the Capitalists,” co-authored with Chicago Booth economist Raghuram Rajan, seems applicable to the current situation.

“The weakness of the capitalist system is not that it doesn’t work economically but that it’s hard to sustain politically,” Zingales says.

With ordinary Americans losing their jobs and elite bankers begging for help, political intervention is a given, he says. In spite of good intentions, it may end up impeding the functioning of the market.

Guarantee of Nothing

OK, so capitalists screwed up, to borrow a phrase from the new president. So did homebuyers who thought there was a free lunch. And mortgage lenders who were slinging the hash.

That’s not a reason to implicate the entire system, unless you think the government can do it better.

“The capitalist system stumbled and fell,” Bianco says. “It’s just like teenagers, who do stupid things. Sometimes the solution isn’t putting restrictions on them but letting them pull themselves up.”

How’s this for a twist? For the market to begin to function normally, investors need a guarantee that the government won’t do anything, not a promise that it will.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the columnist on this story: Caroline Baum in New York at cabaum@bloomberg.net.

Last Updated: February 10, 2009 00:01 EST