Once is an anomaly. Twice is a coincidence. Three times is a trend. The US Government has not once, not twice, but three times bailed out a financial company that was facing the consequences of their risky business decisions. The most recent incarnation of this is AIG, the world’s largest insurance company. ABC has a great quote in their piece on the AIG bailout that pretty much sums up the core problem in all three of these bailouts:
“They called it insurance, but they were gambling,” said Nobel Prize-winning economist Joseph Stiglitz. “In a market economy, there has to be a sense of accountability. You can’t come running to the government every time you have a problem.”
This is pretty simple cause and effect. In fitness, this is summarized by the catch phrase “No Pain, No Gain.” In sports, there’s a common saying that “most games are won or lost before they are played.” Another common saying, though I have had difficulty finding its origin, is this:
“Capitalism without bankruptcy is like Christianity without hell.”
I have seen this modified to “Capitalism without failure is like religion without sin” as well.
The point is that these bailouts are the most fundamental of errors. Capitalism depends heavily on fair risk and rewards. If someone takes a business risk that pays out, then those who didn’t take the risk shouldn’t be granted the benefit of regulations limiting the entrepeneurs who did. If someone takes a business risk that crumples underneath them, then those who didn’t take the risk should be rewarded by not seeing the government swoop in and “save” the now-failing company that did. The rules of the game shouldn’t change while it is being played.
Now having said that, there may be some circumstances where letting everything go would be worse than some government intervention. The problem is identifying those circumstances is incredibly hard. We were told that the Bear Stearns bailout was the mother of all bailouts. We were told that the $29 bn we spent there would prevent a domino effect. (Pretty effective, eh?) Then we were told that the Fannie Mae and Freddie Mac needed the world’s largest bailout. They said that the $200 bn we spent there essential to our economy. Now we are being told that AIG is too big to fail. They are saying that the $85 bn we spend there will save a cornerstone of our economy. How is this fair to “small” businesses like Lehman Brothers? What key characteristics were missing in those circumstances? These arbitrary interventions in the market are bad for all businesses.
Now I’m not an economist. I don’t claim to be an expert in this area. I do find it interesting that many of the companies that are failing now are doing so because of prior government intervention in the market. Fannie and Freddie were a government sponsored duopoly in the market. AIG was exercising a massive loophole created by the government. Why aren’t politicians trying to solve these root causes? Why are they so busy trying to wash away the effects?
Instead, the Bush administration wants to spend another $700 bn on bad debt in an effort to “save” our economy. Add this to the $314 bn we’ve already spent on bailouts this year and we would break the $1,000,000,000,000 mark. You can see the trend continuing. It’s great to know that my tax dollars are violating the most basic principle of economics by purchasing a product known to be bad. I want my money back.
Edited to add: Looks like the $700 bn deal could be even worse than I originally thought:
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Hat tip: Tim Lee.