When banks and large corporations make wildly disastrous investments, the losses are socialized as the government bails them out. When those same corporations show wild profits, the benefits go exclusively to private shareholders and company executives.
Why should we privatize profits, and socialize losses? Doesn’t it strike anyone else as the worst possible economic policy?
Yes. It’s called “moral hazard”.
However, it should be noted that this is not the usual turn of events. The bank bailout of recent times was seen as particularly unusual in that the risk to the overall economy of not doing the bailout was greater than the moral hazard. Banks fail all the time, and they are not bailed out.
And almost all the bailout money has been paid back.
Still, I agree with your overall point. Socializing losses while privatizing profits is a terrible economic policy.
It’s industrial policy without having to call it “industrial policy.”
Certainly it is. Those institutions should have been allowed to fail. Ask yourself though…what then? How would you feel about the situation if the various financial institutions had been allowed to fail? Would the public have been willing to take the bitter medicine? How about if the automakers who were bailed out were allowed to fail? Would it be ok to let all the folks working for them suffer so as to ensure that the rich got their just deserts?
Me, I think that we would have had a much rougher road had the banks and other institutions been allowed to fail, but assume we survived we’d probably have been better off in the long run. However, it was in the public’s best interest (as defined by the public and by the government leadership) to not have that happen. C’est la vie.
-XT
The idea is that the government isn’t acting to help the bank or large corporation. It’s acting to help society at large. The collapse of the business would have harmful effects that would pass beyond the business itself. So the government gives the business money to prevent society at large from experiencing the harmful effects.
When a bank or large corporation makes a profit, nobody experiences any harmful effects from it. So the government has no reason to act.
Think of government bailouts as being like a fire department. The fire department only goes to houses that are on fire. But it makes no sense to say the fire department should also go to houses that aren’t on fire.
They could have wiped out the shareholders, soaked the bondholders, and spun off several new banks with clean balance sheets, with a government guarantee that they’ll liberally finance them at breakeven borrowing rates until they can get back up to speed, coupled with a return to the Glass-Steagall framework of separate retail-investment banking operations.
It still would have cost us a ton of money, but we would have healthy banks instead of the shambling corpses we have now, and the shitty senior management and boards of directors could (not necessarily would) have gotten the boot. Unfortunately, Tim Geithner and Obama seem to believe that no bondholder should get left behind.
So when the government spends trillions of dollars of public money to float failing businesses, why does that business not then belong to the people who’s tax money was spent rescuing it? If we’re going to socialize a loss to prevent a catastrophic failure of a business, why is that company allowed to remain owned by individuals?
No, in moral terms, it appears to be a lot more than a hazard.
It wasn’t trillions. But the idea is that banks, with improved regulation, are best run as private enterprises.
Okay, so where’s my improved regulation? Did we really spend a zillion dollars and get only improved regulation in exchange? (except without any actual improved regulation)
Well, if we are going to fantasize they COULD have nationalized all of the banks, declared socialism and put Mickey Mouse on the American throne as well. However, they are as unlikely as your suggestions of what was politically possible, even if there wasn’t a single Republican in office at the time.
I believe that your suggestions would have been even more of a disaster than what we got, but it’s moot…politically it wasn’t going to happen. What DID happen is what was politically acceptable to both Democrats and Republicans who favored those measures. I don’t think that what we did get was the optimal solution…it’s certainly not what I would have done, had I been God King of America…but it was the least odious political solution on the table at the time that would still prevent a complete collapse of our financial system.
-XT
Your belief has no basis in any fact, experience, or knowledge. It’s useless.
Seriously, why do you post in these threads? You have nothing of substance to contribute.
Well, seriously, for the same reason you do, considering your own lack of grounding in reality…obviously because we both like to argue.
Belief has nothing to do with it. Political reality shaped what happened. I realize that you can’t grasp this seemingly basic concept so I’d say just push on with your own beliefs. I’m sure they give you comfort at night.
-XT
First, you post some insipid “heh, socialism” comment, even though TBTF is a form of socialism, and the fucking thread is titled “Lemon socialism?”. Then you essentially argue “it could have only happened the way it happened,” but the whole point of the thread is to examine corporate socialism and moral hazard, which leads to questions of why it’s done and whether there’s a better alternative. In the case of the banks, I provide such an alternative (an alternative Sweden chose), but I guess the idea that things could have been done a different way is a totally mind blowing concept to you, since you couldn’t come up with anything more intelligent than “Well…it didn’t happen that way.” Awesome insight there. You’d rather be the David Brooks of Straightdope, posting simplistic, middle-of-the-road pablum, and filling space with a bunch of empty paragraphs than actually exerting the barest level of thought and effort into replying to a thread, you unbelievable bore.
“Sick and tired of Lemon Socialism? Make your voice heard now at www.lemonparty.org!”
Because America exists the serve the needs and desires of the very wealthy, and no one else. The rest of us exist just to serve as resources and toys for them. So we pay for their mistakes because as far as they are concerned that’s what we are for, and they own the country.
Um, no…did you actually READ what I posted? Because it seems you are reeling off a tape recorder here. I didn’t say anything against socialism in my first or second post…what I said was that political reality precluded your fantasy and that if those businesses had been allowed to fail then the PUBLIC as well as the POLITICAL fallout would have been unacceptable. Please, shut off the tape recorder of what you THINK I’m saying and actually read it. It’s still probably bullshit, but at least lets try and stick to it being my actual bullshit, and not your strawman of my bullshit.
I like to at least try and stick to something close to reality. Here is what you said that I was responding too:
Yeah…THAT’S really likely to have been a possible political solution.
Um, sure…again, the probability of this being politically acceptable is on par with snowballs in a furnace. These aren’t even politically acceptable in Europe, let alone in the US, let alone when Bush was president.
The government was going to spin off new banks by fiat? Not that this is a bad idea, mind (myself, I ‘believe’ that the government should have bought up the poisoned assets to clear the balance sheets, though that was politically unacceptable as well), but the reality is that this was never in the cards.
How would this have worked financially, let alone politically?? You are going to force your fiat banks to loan money at breakeven rates? I can’t even begin to imagine all of the unintended consequences from such an action, but I’d say they would be pretty horrific. But even if I’m full of shit there is, to put it gently, zero way you could have gotten something like this politically off the ground.
Leaving aside beating the ‘this isn’t realistic’ dead horse, what do you suppose this would have done? I ask out of genuine curiosity here…how would this have helped speed a recovery, or if not that, what do you propose that this would accomplish?
Thank you for your cogent analysis. 
-XT
In the documentary ‘inside job’ a high ranking worker in finance (I forget his title, maybe VP or head of something for a major bank) said reaching ‘too big to fail’ status was something banks shot for because they know if they screw up they will be bailed out. You take risks and if you succeed you keep the proceeds and if you lose you get bailed out (Simon Johnson wrote a good article about this in the Atlantic).
We are a hybrid democracy-plutocracy. This is the kind of policy you’d expect in that system.
nm
Does the fire department own your house if they put out a fire?