21 September, 2008

Socialism of the rich

The US has bailed out AIG, in the process taking operational control of the company. I haven't seen all the details, but I suspect some variation on the "golden parachutes" deployed from Fannie Mae and Freddy Mac. The government then proceeded to dump $700 million into the markets to pick up the "toxic mortgages" and other bad paper that threaten to freeze the credit markets.

Some kind of bailout is probably necessary, if we are to avoid a collapse on the scale of the Great Depression. The more I look at the details of this deal, it looks like a scam.

There's no surprise to that. For the largest players, the system has been a cycle of booms and bailouts for several decades: private profit, public risk. We can talk about credit-risk derivatives, greed, complexity, moral hazard, over-leveraged deals, and so forth, but there's a more basic problem. As one observer put it,
If financial behemoths like AIG are too large and/or too interconnected to fail but not too smart to get themselves into situations where they need to be bailed out, then what is the case for letting private firms engage in such kinds of activities in the first place? Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the taxpayer taking the risk and the losses? If so, then why not keep these activities in permanent public ownership?

The system, as it exists--and as it is coming to be--seems to be a socialism for (some of) the rich. Financial interests--acting rationally as individuals within the system that was constructed--have bet that there will always be a "sucker" to take the bad paper. It might be foreign investors. It might be the Chinese government. It might be somebody's retirement fund. When the world finally runs out of chumps, the bet went, there's always one you can depend on: the US government, backed by the American people.

Well, crunch time is here, and it's time to see what kind of a penalty the hedge fund managers, et al, will pay for their actions. At present, it looks like socialism for the rich will endure. Or, as suggested above, another kind of socialism might be tried, one that probably would do no better. Either way, some people are being granted the power to manufacture money, without fear of paying for their mistakes. Becasue of basic economics, the bill will have to be paid by someone--through inflation, a falling dollar, unemployment, etc. It just won't be these guys.

Of course, you can trust the government to do what's right, uninfluenced by lobbying or partisanship. In the final analysis, this is a system of laws, right? The national interest includes all of us, right? It isn't even possible to use these tools to consolidate power or crush opposition, right? Right?

"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."

--From the proposed $700 billion bailout legislation

Why am I not relieved?


1 comment:

Jeremy said...

As an Austrian economist pal of mine put it recently..."Paulson and Bernanke are now the two most powerful human beings in the history of the universe."