Some Thoughts on Bailouts

First, there was the shotgun marriage of Bear Stearns and JPM. Then $85 billion to AIG. Next came the loans to shore up money markets. Finally Friday’s announcement of a special program (most of the important details still unknown) that will cost “hundreds of billions of dollars”.

And of course don’t forget the alphabet soup of special facilities created by the Fed to protect the big money movers.

Bailouts, all. A lot has already been said, of course. But there are two things that I wanted to add to the conversation.

First, folks on the left and the right have referred to the recent onslaught of government bailouts as “socialism”. On the surface, it may seem that way, given that government now “controls” vast swaths of the nation’s financial system. But nothing could be further from the truth.

Let me say it more plainly; this is not socialism. Socialism is a form of government that seeks to equalize the playing field for all, insuring that that the fruits of labor are shared equally (but not fairly, necessarily. That’s one of the major reasons why socialism doesn’t work). Does anyone seriously think that captains of finance have embraced the philosophy of “workers of the world, unite!”? The same guys with multi-million dollar “golden-parachutes”, sometimes taking home more than a billion dollars in a year. The same guys who have embraced shady accounting practices so that they and their companies pay as little in taxes as possible, sometimes percentages of income far less than the average American worker. The same guys who have broken union after union over the decades. We’re supposed to believe that just this week this crew has decided to abandon Friedman and embrace Marx with open arms? Come on…

Let’s look at it another way; does anyone seriously believe that the average American stands to benefit financially from the actions taken this week? That the profits of AIG, or BS, or Fannie and Freddie will be split equally amongst the masses? Of course not. Instead, tax payer money will flow from the Treasury to shore up the accounts of what should be insolvent corporations. Essentially out of your pocket and into the hands of Wall St, only making a quick pit stop in DC. Or worse, putting it on the national credit card by selling even more treasuries. This is not socialism. Instead, this more resembles a different form of societal structure: kleptocracy.

Second, how did we get to the point that simply the failure of one company would mean utter chaos for society at large? This fact alone illustrates very nicley that the financial system ceased to be a free market long before last week. The lifeblood of free markets is competition. Competition gives birth to fair pricing of goods and services as well as efficiency of commerce. If one business fails, another takes its place.

The fact that these corporations were to big to fail means they were too big. Period. If AIG couldn’t hack it, then some other corporation would have stepped up to the plate. That is if the market place was truly free. But clearly it was not. Instead, what existed was at the very least a pseudo-monopoly. Many markets left to themselves will gradually evolve into monopolies, and one of the roles government needs to play is to insure that monopolies don’t get to the point where they distort free markets to the point where they aren’t really free anymore. Obviously government failed to meet that obligation in the financial sector the last few years.

I suppose that’s what happens when the foxes are put in charge of the hen house. Only time will tell if the foxes can keep fooling everyone into believing that there are still some hens left.

Note: It should go without saying that the above is my opinion and my opinion alone. No doubt that many of the other Angry Bears would disagree with at least some parts, if not the whole. But I’ll say it anyway.