Corporatism, Not Capitalism

The free market has nothing to do with the current crisis

Radley Balko | September 24, 2008

Forget AIG for a moment. Forget Freddie and Fannie, Merrill Lynch, Bear Stearns, and Lehman Brothers. Imagine a company much bigger. Imagine a company that at the end of this year will have spent $400 billion more than it has taken in. Worse, imagine that the company's accounting is so bad, the $400 billion doesn't even begin to cover the whole of this company's liabilities.

In fact, the company deliberately chooses to use what's known as "cash accounting" rather than the more accurate accrual accounting. Cash accounting looks at how much cash the company has on hand, regardless of future liabilities. It's like saying if you have $75 dollars in your checking account right now, you're $75 in the black, never mind that you've deferred your car payment, quit your job, and have a rent check due at the end of the month.

The company also practices dirty accounting tricks like "forward funding," "advance funding," and "delayed obligations," deceptive tricks that hide its precipitous finances from auditors and its investors.

This company routinely borrows from its workers' pension plan to pay off its debt. Its accountants then claim that because the company owes the borrowed money to its own pensioners and not to outside creditors, the resulting hole in the pension plan doesn't really count as a liability. Sometimes, the company's executives neglect to pass a budget at all. When that happens, they keep the company running with "emergency expenditures," which its accountants don't consider real expenditures for records-keeping purposes, even though they're paid with real money.

By now, you've probably guessed where I'm headed. I'm not really talking about any private company. I'm talking about your federal government. If any private corporation employed the same accounting tricks Congress and the White House use to hide the government's massive debt and financial liabilities, its board and executive officers would all be in prison. In the government, it's common practice. And that's not even considering the funding of our two ongoing wars, which somehow emanates from outside the normal budget process.

If the government were required to abide by the same accounting standards as private industry, its debt would be in the trillions, not billions. Last May, Dallas Fed President Richard Fisher said that the government's unfunded liability for Social Security and Medicare alone comes to a staggering $99.2 trillion, or $330,000 for every man, woman, and child in the United States. It's an impossible figure.

So when congressional leaders and presidential candidates Sen. Barack Obama (D-Ill.) and Sen. John McCain (R-Ariz.) call for more government oversight of our struggling financial institutions, go ahead and laugh. You know you want to. The idea that the private sector would be in better shape today if only we demanded more oversight from our politicians is preposterous. Our politicians wouldn't recognize "fiscal responsibility" if it spat in their ears.

Wall Street moguls may be "greedy," as both John McCain and Barack Obama have described them, but at least there are real consequences when their greed becomes excessive. They go out of business.

Except, that is, when the government bails them out. Thus far, in addition to being on the hook for the federal government's own massive debt, taxpayers are also putting up $85 billion to back insurance giant AIG and up to $100 billion each to back Freddie Mac and Fannie Mae, and we're funding the Bear Stearns backstop. Congress is also expected to approve at least $25 billion in corporate welfare for the big three automakers. You can probably expect more handouts down the road. All of this has some analysts now questioning the U.S. government's bond rating, and worse, wondering whether the government itself may soon collapse under the weight of its own debt.

When you, Joe Citizen, spend frivolously and default on your loans, the bank takes your house. When the government spends your tax dollars frivolously, it simply cooks the books to cover its excesses. When the books are left in ashes, the government just takes more of your money, or it prints more money, leaving the money it hasn't already taken from you devalued. Over the last few weeks, we've learned that you now face the prospect of an additional indignity: When your neighbor's bank spends frivolously and defaults on its loans, the government's going to take your money then too, to keep the bank in business.

Many commenters have blamed all of this on capitalism. This isn't capitalism. It's a peculiar kind of corporatist socialism, where good risks and the resulting profits remain private, but bad risks and the resulting losses are passed on to taxpayers. There's nothing free-market about it.

Neither Barack Obama nor John McCain, nor either party's leadership in Congress, has proposed a reasonable plan to deal with the government's unfunded Social Security and Medicare liabilities. In fact, all have proposed expensive new government programs that can't possibly be funded over the long term. All seem both oblivious to the federal government's impending financial peril and intent on making it worse.

Perversely, all are then simultaneously demanding that they be given greater control over the private sector—because, they gallingly explain, corporations have shown that they can't be left alone to behave in a manner that's fiscally responsible.

Governments have been screwing over taxpayers for about as long as there have been governments and taxpayers. Capitalism, on the other hand, is a fairly recent development, and has spurred an explosion of wealth and the greatest standard of living in human history. What's happening now isn't capitalism, but capitalism is certainly taking the brunt of the blame.

Unfortunately, the end result may be that our politicians make capitalism more accountable to them—the same people who have shown that when it comes to the government's finances, they're accountable to no one.

Radley Balko is a senior editor of reason. A version of this article orginally appeared at FoxNews.com.

Comments

|9.24.08 @ 12:04PM|#

What ticks me off is the Regime looking out for the Big Wall Street Tycoons. I could care less about Wall Street. When is the Regime going to start taking care of MAIN STREET? The SHEEPLE are more worried about keeping gas in the tank and food on the table! Thats what matters. All Dictator Bush does is look out for the Wealthy. Seems to me Dictator Bush and the top 10% of the richest should foot the bill since THEY are the ones that profit off Wall Street!

Jiff
www.Privacy-Center.net

|9.24.08 @ 12:10PM|#

I really, really, really want to call in a DEA raid on Anonymity Guy.

Tom Walls|9.24.08 @ 12:38PM|#

Thanks, Radley. I'll repost this so all my market-distrustful trendy/leftie friends can see it. They're so partisan-Democrat this year it's not funny.

|9.24.08 @ 12:38PM|#

http://img.photobucket.com/albums/v234/Churchill2004/Untitled-2.jpg?t=1222274275

Mike M.|9.24.08 @ 1:33PM|#

The worst part about this mind boggling tsunami of corporate welfare and siphon-up economics is that not only won't it fix the problem, it's going to merely kick the can down the road a short while but make the problem even bigger than it is now. We're simply creating an incentive for the Street to go on with their crazed business as usual.

Yes, it really would be better in the long run for the country to just endure the pain of an extended recession now.

|9.24.08 @ 2:11PM|#

Balko misses the point. Yes, the government is even more inefficient than free industry and only maintains its hold through inertia, force & propaganda. but the free market did fail in this instance. The USG doesn't bail out all companies that fail, that they want to do it here indicates that these failures will come with presumably unacceptable consequences. So the free market has failed in that an ecology has emerged where failure of some of these behemoths can have unacceptable cascading effects. Of course, if society doesn't care about facing really bad times so that free market actors learn the right lessons, then free markets will always "work".

Balko could have explored, but didn't, the implied notion that these corporates acted differently than otherwise by anticipating the inevitable government safety net.

Ultimately, it depends on whether one supports free markets for moral reasons or practical ones ("invisible hand").

|9.24.08 @ 2:28PM|#

My hunch is we are plan B with these guys. They have a plan C, D, E, F, etc., but they are worse off for them. The gov't needs to be plan Z, like when you ask Paulie Cicero to be your business partner. We take all you assets, buy up stuff on your credit, and when you finally have to close the place, we happily help you burn it down.

Paul|9.24.08 @ 2:28PM|#

but the free market did fail in this instance.

The free market has not failed in this instance. At. All. The free market did exactly what it was supposed to do.

Why is this so hard for people to understand? What is it about the free market that people think has failed when faulty players are taken out? That's not a market failure, that's called a market success.

The free market successes are being repeatedly inhibited by government intervention.

Of course, if society doesn't care about facing really bad times so that free market actors learn the right lessons, then free markets will always "work".

Right, so what you're saying is that in your world, a successful free market is one that has no pain, no consequences, no negative fallout.

Paul|9.24.08 @ 2:30PM|#

And need I remind everyone that Wall Street and capitalism have nothing to do with eachother?

Don the libertarian Democrat|9.24.08 @ 2:31PM|#

That's why we need a trade-off, like a guaranteed income. Corporatist Socialism is our system. The only way to attack it is to move the social safety net to the truly needy, and then let the economy grow reducing the number of truly needy. However, you're going to have to produce a real and viable social safety net for the truly needy in order for the state to ever meaningfully decrease over time. In the short term, we're stuck.

|9.24.08 @ 3:05PM|#

The argument is that we have companies that are "too big to fail".

Says who?

Even if true, is the answer really to regulate so that they don't fail, or, rather, to manage the failure, in bankruptcy court, to minimize the disruption?

I am deeply suspicious of any attempt to claim that ANY company is "too big to fail" and hence must be propped up by the state. Who benefits from that? The politicians and the corporate backers.

It seems likely to inevitably lead to a situation where we have a bunch of state-propped-up industries, rather reminiscent of centrally planned economies.

These companies should be dismantled, and their assets returned to the free market.

|9.24.08 @ 3:07PM|#

Gyan,

"Balko could have explored, but didn't, the implied notion that these corporates acted differently than otherwise by anticipating the inevitable government safety net."
Precisely, as in:
ponzi?

Paul,
"Right, so what you're saying is that in your world, a successful free market is one that has no pain, no consequences, no negative fallout."

You missed the part in Gyan's post where he said: "...an ecology has emerged where failure of some of these behemoths can have unacceptable cascading effects."

The Glass-Steagel repeal, as well as the CFMA, allowed the behemoth trading banks to exist. When the banks have more money in CDS instruments (by some accounts over 62 trillion dollars) than exists in the entire US economy, a cascade failure is definitely going to wreak more havoc than most citizens would find acceptable. If it is possible to enact common sense regulations to prevent havoc on this scale, we ought to do it. Sure, the road to hell is paved with good intentions and all that, but that's not a sufficient argument for abandoning good intentions.
Note that I am not arguing for the current bailout scheme. There ought to be a better way to unravel the CDS mess. Having 62 trillion of paper debt securing just 2 trillion in real assets is insane.

Fresno Bob|9.24.08 @ 3:17PM|#

You know, I really startin' to feel bad for Hank Paulson. I mean, the guy's gonna be losin his job early next year. And after this debacle there's no way for him to make a buck.
Seriously, how's he gonna feed his family once he's out of office?

My heart bleeds for you, Hank!

|9.24.08 @ 3:19PM|#

The free market did exactly what it was supposed to do.

Exactly right. The federal government provided a risk-free backstop for the mortgage packagers, and they did exactly what the market would expect -- they shoveled as much paper into the conduit as they possibly could. Why not? There was no downside. Voila, the free market at its best.

The quote of week (from a writer at Politico): "They socialzed the risk and privatized the profit." Amen.

|9.24.08 @ 3:20PM|#

Great column Mr. Balko.

Tom Walls|9.24.08 @ 3:31PM|#

Gyan, because these large firms made a lot of poor choices doesn't mean the market failed. There will always be failure - but how much of it constitutes a crisis? I don't think anyone maintains that there would be no crises in a theoretical pure market system. Multiple actors can make multiple bad decisions in any system.

Of course you make an excellent point by addressing the "notion that these corporates acted differently than otherwise by anticipating the inevitable government safety net." That's exactly what the S&Ls did in the '80s after Reagan increased the deposit insurance to 100K per account and lifted investment restrictions. Alas, all the blame is placed on deregulation and not on having maintained deposit insurance.

I don't know if these investment banks fully anticipated a bailout, but easy credit certainly encouraged their foolishness. There are probably many other parts to this picture.

Wal-Mart|9.24.08 @ 3:48PM|#

Justifying the bailout of large banks by taxpayers by saying it has "unacceptable cascading effects" is a lot like saying that if you don't bail out Wal-Mart, then there suppliers will lose a big customer, employees will lose their jobs, and this will all have a negative impact on the economy. Which is true, but these are the symptoms, not the cause. Propping up inefficient or self-destructive companies doesn't work.

However, since we are doing that, our company would like to suggest that since we're so important, and have been hurt by this recession, we deserve some money too.

zoltan|9.24.08 @ 4:02PM|#

:: waves hands ::

What do you guys think of fractional reserve banking?

hotsauce|9.24.08 @ 4:07PM|#

Safety net for the truly needy? Definition of "truly needed" please.

And while I'm on it, for everyone making the too big to fail argument (politicians and other statists, mostly), please define "too big to fail."

Show your work.

|9.24.08 @ 4:25PM|#

The notion that repealing the Glass-Seagal act created the problem is misguided.

The repeal of that act was a necessary response to the convergence of commercial banking and investment banking that was ALREADY taking place as a result of online trading and the influx of small investors into the stock market.

It's the reason you can write checks from your Ameritrade account, and why your cash in that account is invested in money market funds. It's what has allowed people to use stock accounts interchangably with savings accounts.
That's a good thing.

And we're not going back there anyway, since Morgan Stanley and Goldman Sachs have become commercial banks. They aren't going to just suddenly dump all those billion dollar pension funds so that they can separate themselves from the investment market. Like it or not, there is no dfference between commercial or investment banking anymore.

Don the libertarian Democrat|9.24.08 @ 4:42PM|#

My definition of truly needy is not middle class. In other words, people who are destitute. We need to reduce the size of government dealing with the upper and middle class, and confine it to the poor. For a plan put forward by somebody smarter than me, read Charles Murray's "In Our Hands".

|9.24.08 @ 5:19PM|#

Paul is absolutely correct, this is a market correction that would be expected in a free market system. In the libertarian world the free market punishes stupidity with failure. But there is a problem with this model. The CEO's of these corporations are not punished, they leave the ruins of the business with a lot of wealth even if they don't get their package. For the CEO and his cronies there is no consequence for failure. Problem two is that there are a lot of people who have lost a lot of money and are pissed of about it. In the Libertarian dream world people supposedly learn from their mistakes and go on. In the real world they blame someone for deceiving them, particularly if they were not directly involved with the situation and got hurt anyway. They follow the demagogue that finds a scapegoat and promises them retribution. You don't get more freedom from the boom and bust cycles of a libertarian economy, you get Mussolini.

|9.24.08 @ 5:22PM|#

"Right, so what you're saying is that in your world, a successful free market is one that has no pain, no consequences, no negative fallout."

Hence the more sophisticated mixed economy that evolved after FDR. We can have capitalism with regulations that attempt to mitigate pain.

Enough with the foolish idea that only a totally free market will produce the best products, services, inventions, society, etc. It only produces massive income inequality. If that's the society you want, knock yourself out, but intelligent people can deduce what societies need, can call upon governments to see that it is provided. Let the free market do its thing and produce better cell phones. The free market has never produced a railroad, a space program, a national highway system, or universal education. It can't do everything. That's why we have brains.

classwarrior|9.24.08 @ 5:32PM|#

Radley, the "corporate socialism" you complain about is the perfectly predictable outcome when corporations are granted the same rights as flesh-and-blood human beings including the right to make large campaign contributions (i.e. bribes) as a form of "free speech", all with the goal of maximizing profit by whatever means they can get away with. Wake up! I'm not a Marxist by any means, but this is the example of capitalism's internal contradictions and the problems it can create for the rest of us.

|9.24.08 @ 5:40PM|#

Tony, I don't think I need to point out that what is being proposed in this bailout is not about mitigating the pain of anyone other than corporate bankers and their wealthy shareholders. I don't see how it in any way contributes to education, infrastructure, or technological innovation either.

It's totally about politicians expanding their own powers, while protecting politically connected investors on Wall Street.

|9.24.08 @ 5:43PM|#

The notion that repealing the Glass-Seagal act "created the problem is misguided."

Hmm. Here's one of the reasons for keeping the act, as written in 1987 (from wiki):
3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.
Here's the rebuttal, an argument for the repeal:
3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them - by diversification.

You be the judge. ;-)

|9.24.08 @ 5:46PM|#

My kids are so fucked.

Here's your half million dollars in unfunded liabilities! Have fun!

|9.24.08 @ 5:54PM|#

"It's the reason you can write checks from your Ameritrade account, and why your cash in that account is invested in money market funds."

I agree that this is a convenient thing. That doesn't have to negate the existence of some firewall regulation between the investment division and the depository division of Ameritrade, for example. Deposit banks shouldn't be allowed to write enough bad paper to negate the FDIC's ability to insure the deposits!

|9.24.08 @ 6:05PM|#

"...what is being proposed in this bailout is not about mitigating the pain of anyone other than corporate bankers and their wealthy shareholders."

Not exactly. Lots and lots of little people that have 401K investments in AIG (for example) would take it in the shorts when AIG goes belly up. And it's certainly not fair to chastise the little people for not scrutinizing AIG more closely. The mortgage backed securities they hold are AAA rated. ;-)

The current bailout plan does suck, however. Sending corporate bankers the right message, while not completely shitting on the little guy is going to be tricky.

|9.24.08 @ 6:11PM|#

"The free market has never produced a railroad, a space program, a national highway system, or universal education. It can't do everything."

You were doing fine until that sentence. For one, there is a private, free market space program. Two, I wouldn't be bragging on "universal education" so much.

|9.24.08 @ 6:22PM|#

Great article but you forgot to mention that Fannie Mae which was invented by the government and funded by the government and given special access to federal funds created the market for Sub-prime loans.

If the government had not created Fannie Mae there never would have been a market for sub-prime loans.

|9.24.08 @ 6:28PM|#

"Lots and lots of little people that have 401K investments in AIG (for example) would take it in the shorts when AIG goes belly up."

Most 401ks are pretty diversified, precisely so their exposure to failure by any one institution is limited. Still really not seeing any little guys getting seriously burned here.

So far, I haven't seen any evidence that deposits in commercial banks have been threatened by this crisis either. Despite the breakdown of the commercial-investment barrier. Nobody has suggested they are.

I accept that the cash in my Ameritrade account is less secure than the cash in my checking account. I'm okay with that.

It's not the commercial banks getting burned here. It's the investment banks who bought these securities. The commercial banks were actually insulated from bad mortgage losses by doing it. They effectively transferred the bad debt to Wall Street investors instead of depositers.

It would be another story if the commercial banks had bought dot-com stock and then seen their money evaporate when that bubble popped, but that isn't what's going on here. It's the other way around.

Sam Grove|9.24.08 @ 7:01PM|#

The free market has never produced a railroad, a space program,...

You are quite mistaken. There were a number of railroads built without land grants, etc. from government.

There are private space companies.

The free market built the airline industry.

|9.24.08 @ 8:56PM|#

If the government had not created Fannie Mae there never would have been a market for sub-prime loans.

Joshua --

Not exactly. There would still be sub-prime loans, but they would have been priced according to market reality (i.e., serious credit analysis) and not priced the same as prime loans (or even lower, with short-term "teaser" rates).

Knowing that the federal government was ultimately backing up the purchase of virtually unlimited volumes of securitized receivables from these loans, the originators had no incentive to assess the mortgagors' credit according to market standards; they said "Come on in!" and took every deal they could find, regardless of income, payment history, credit rating, and other basic indicators of ability to repay the loans.

There was no downside risk to anyone in the chain (originators, packagers, securities issuers) until they hit the wall at good ol' Fannie Mae.

Thus, the "bail out" is really just continuing to do what Fannie and Freddie (and Sallie Mae, too, for that matter) had been doing all along -- buying up all the bad paper that was shoved down the pipeline to them.

As usual, federal "support" disconnects the upside benefit from the downside risk.

|9.24.08 @ 9:06PM|#

Hi everyone, first time poster here.

I really would like someone to address classwarrior's statement, as it is my own. He goes on to say:

"Radley, the "corporate socialism" you complain about is the perfectly predictable outcome when corporations are granted the same rights as flesh-and-blood human beings including the right to make large campaign contributions (i.e. bribes) as a form of "free speech", all with the goal of maximizing profit by whatever means they can get away with. Wake up! I'm not a Marxist by any means, but this is the example of capitalism's internal contradictions and the problems it can create for the rest of us."

I'd like to know, honestly and not sarcastically, how this statement is wrong. Wouldn't a company owner WANT to get tons of free money? If the 'virtue of selfishness' (as Rand puts it) is the engine of the free market- then isn't it also the destroyer of the free market? Isn't it in in the businessman's self interest to get the best deal he can on something? Then, inevietably- would he not engage in anticapitalist activity because of his inherent adherence to it's tennants?

I have to say that I agree with classwarrior for now, as I too see this contradiction- and no Free Marketer ever really explained it away. Usually, this discussion I've had with people has been framed in the topic of monopolies.

Again, I am asking this as an honest question and am open to reasonable explainations and conversation on the subject. Not trying to flame, but have a real exchange of ideas here.

|9.24.08 @ 9:17PM|#

Just --

The statement itself isn't "wrong," but the premise on which the conclusion is based is faulty. Making campaign contributions (large or small, personal or corporate) would not create problems if the government did not wield such enormous power over peoples' lives. Or, to put it the other way around, because the government wields such enormous power over peoples' lives, there is a great "selfish" incentive to try to influence it to wield that power in your favor.

If the government's powers were in fact limited to those enumuerated in the Constitution (as strictly interpreted), there would be no incentive to seek to influence it, at least not on so grand a scale. And, in that case, no incentive to make large campaign contributions. Your money (or a corporation's money) would be better spent trying to influence customers to buy products or investing in improvements to increase profit margins, not to seek to influence government power brokers.

Nick|9.24.08 @ 9:19PM|#

Ok, confession: I went from being rabidly opposed to this (or some similar) bailout to grudgingly supporting it.

Economists seem to agree that the short- and long-term costs of not doing a bailout will exceed the costs of doing it. If the market collapses, and we need to quit fooling ourselves that this is just one or two companies, do we really want to have another Great Depression followed potentially by another New Deal?

I am a laissez-faire advocate but also a realist. I truly loathe this bailout but am more convinced than before that we really have no choice. We don't live in a free market society and this won't get us any closer to that. But neither will a market collapse - and that would likely be resolved by socialism or Keynesianism anyway.

So our choice is more state corporatism now with the chance to prevent a meltdown, or a meltdown followed by socialism and Keynesianism afterwards. Note also that the bailout is a loan and not "free money" and that the assets of the corporations purchased are not value-less. Many economists are arguing that government's initiative would lead to the gradual selloff of the debt to private entities, which could be actually profitable for the government.

We can argue all day whether the market or the government or both caused this, and we can argue all day that this likely never would have happened or been anywhere near as serious in a free market (I agree 100%) but the fact is we have to confront the issue as the reality it is right now. And because I have yet to hear laissez-faireists promote an immediate and preferable solution to the problem that can prevent whole industries from collapsing, I must debate between the differences of action and inaction.

First thought was "let them fail" but then common sense said that "if they fail, everyone's going down with them." The cost to the economy could easily exceed the billions pledged to fix it. The impacts on the economy are too broad for inaction. Letting the financial industry fail is not a viable solution and will certainly not prevent statism, socialism, Keynesianism and corporatism, nor will it make (misguided) average citizens any more friendly to the idea of free markets in the long term. We've never fully recovered from the loss of trust from the Great Depression. Certainly another one would only be the deathknell of capitalism.

I hope someone here can convince me otherwise. I just think we all need to consider realistic economics before subscribing to our own orthodoxies.

laissezfailed|9.24.08 @ 9:26PM|#

Suck it free marketeers. The system of dark paper, of completely unregulated, absolutely unencumbered deals brought us to this point: the complete collapse of the unregulated market into a sclerotic and fear-filed freeze ith these formerly fearless financial whiz kids unable to trust each other enough even to do credit swaps any more. Without regulation of the people, by the people, and for the people to create functioning markets with trust enforced through the State's monopoly of violence, all we have is dysfunctional anarchy. and paupers. We create markets to serve us, not the other way around.

Nick|9.24.08 @ 9:33PM|#

"I too see this contradiction- and no Free Marketer ever really explained it away."

It's simple really. In a free market, there would be no such thing as a corporation. I don't know how many of Reason's staff buy that (or Cato's for that matter), but in a free market, a business would NOT have the same rights as an individual. The owners of the proprietorships, partnerships and cooperatives that would exist in a free market economy would be fully accountable, both legally and financially, for their misdeeds, bad business decisions, and violations of rights and properties. Because of the increased risk that comes with growth of such companies, I would argue that most companies would stay small and competitive, and monopolies wouldn't exist. In an environment without corporate shields, few would risk entrusting different sectors of their business to actors who they don't know or trust and who don't have a personal financial stake in operating honestly and legally. Therefore I can't see big business really existing. That's also why we never would have been at this point today if we lived in such an economy.

Adam Smith himself found corporations to be perversions of a free market and inclined to act monopolistically because of the powers they were granted by government.

Nick|9.24.08 @ 9:40PM|#

"The system of dark paper, of completely unregulated, absolutely unencumbered deals brought us to this point"

If you think the financial sector was unregulated, I've got an invisible bridge to sell you. The SEC's entire purpose is regulating the sector. Government forced these companies to give out bad loans and mortgages, which is why we are here today.

That said, I still don't think we have much choice beyond a temporary government bailout (followed by rapid stabilization, reprivatization and deregulation/reversal of the market distortions that got us here.)

|9.24.08 @ 10:03PM|#

"First thought was "let them fail" but then common sense said that "if they fail, everyone's going down with them." "

Say's who?
Why can't we find a managed failure solution so that they get shut down in an orderly fashion? isn't that what Chapter 11 is supposed to be FOR? If they aren't ready to declare bankruptcy, why are we helping them?

The argument seems to be that their failures would cascade by causing a run on the banks, or by freezing the credit market. But that's premised basically on the assumption that everyone's going to behave irrationally. Maybe all that's needed is a time out so that panicky investors or lenders have a chance to regain their senses.

|9.24.08 @ 10:03PM|#

Crusader, thanks for the reply. You said,

"If the government's powers were in fact limited to those enumuerated in the Constitution (as strictly interpreted), there would be no incentive to seek to influence it, at least not on so grand a scale."

I don't see how there would be no incentive, especially if there is a good risk-reward ratio. If I'm a multi-million dollar business, why wouldn't it be a bad idea to take, say, %1 to %5 of my profit and put it towards influencing my government to do what I want it to. Depending on your particular strategies there is in fact, a great incentive. Because if you wind up that you CAN find influence, you can influence to "expand" in the manner you see fit. Another way to look at what I'm trying to say is that "to seek to influence government power brokers," as you put it, can easily be rationalized as, "investing in improvements to increase profit margins," and you also say.

Now, I'm not saying that this is right(as in morally), or even inevietable. What I am saying is that it's highly likely. And what I never understand about Free Marketers is that what I always get as an answer to this mental experiment is that "a real capitalist wouldn't do something like that." There seems to be this faith that capitalism "can't" or "won't" take the reigns of government. The inevietable power struggle is that people try to pulls the reigns back with voting, in the form of government regulation and law making. Again, not that I'm advocating communism- but, it seems to at least a reasonable thing to attempt.

One of my many ruminations on the topic is that we HAVE had this limited government you wish for. We HAD it, and it was expanded by those with money in the way they saw fit. If this limited government had worked then the way you're saying it will if we return to that way now, we wouldn't be in the situation in the first place. Of course, I'm taking a simplistic tack here. I'll admit that, and again- I'm open to response. But I'm still seeing that the idealized 'limited government' inevietably become large because of capitalism itself.

Also, laissezfailed- you're not helping when you start posts with "suck it".

|9.24.08 @ 10:07PM|#

Nick,

Agree, but I am having a very, very hard time swallowing the kool-aid. When guys like Warren Buffet are buying Goldman it seems to me there are bargains to be had. I am betting he will draw others out of the woodwork and turn this around.

Once these controls get put into place they will become permanent. The consequences would be worse than a big pull-back. "Reprivatization and deregulation" - can you cite examples where the govt has done that? It sounds like wishful thinking.

|9.24.08 @ 10:11PM|#

Nick,

I'm interested in what you have to say about the rights of corporations. I'm familiar with the fact that they have the same rights as people- but admittedly I'm not much more versed on the subject than the fact that certain people on the internet think it's bad. I'll have to search for more info and literature on that subject. Any suggestions?

It would seem that big business wouldn't play a part in that system. Your ideas would paint a very different scene of american life, for sure. I wonder how feasable that kind of reform would be, though.

Nick|9.24.08 @ 10:50PM|#

"Reprivatization and deregulation" - can you cite examples where the govt has done that? It sounds like wishful thinking.

Might be, T Maz. That's just my ideal solution not necessarily what will happen. Grant a temporary loan, let it stabilize the market and then sell it off to the private market. At the same time, granting this bailout doesn't preclude that the government CAN'T fix the market distortions that caused it. I think libertarians and conservatives should argue that correcting these distortions is the only way they'd jump on the economic bailout bandwagon. I'm just trying to see this from the perspective of an pragmatic economist moreso than of a libertarian ideologue.

" I'm familiar with the fact that they have the same rights as people- but admittedly I'm not much more versed on the subject than the fact that certain people on the internet think it's bad."

just asking,

The "corporate veil" basically says that the individuals who own the corporation are not financially and legally accountable for the actions of the corporation.

Owners can only lose the money that they put into it, but not their own personal income. (This is done to protect non-managing stockholders who are considered "owners.") This is opposed to a proprietorship, where the owner can lose every penny of his personal wealth and thus has strong disincentive to run an irresponsible business. In a free market, the economy would be built on proprietorships instead of corporations, whose very nature involves government interference with the economy.

The corporate veil also allows corporations to face trial as one entity and pay settlements out of profits instead of having the individual actors go to jail. To hold individual corporate criminals accountable, it requires the government to "pierce the corporate veil" which is fairly rare, mainly because the chain of actions within the corporation is so dissolute it is difficult to pin down responsibility. Enron was the exception to the rule, and pretty much the entire executive team went to jail.

In a free market, laws against fraud, violation of property and violation of individual rights would all still exist, but individuals would not be able to hide behind the corporate entity and thus would be more legally accountable for their actions, not less. If their business fails because of bad practices, they risk their own personal wealth as well.

It would benefit consumers by moving the economy to a more perfectly competitive economy, a "nation of shopkeepers" if you will.

"Your ideas would paint a very different scene of american life, for sure. I wonder how feasable that kind of reform would be, though."

Again, it's a guiding ideal and not politically feasible or accomplishable. I'm a realist when it comes to policy. With 97% of Americans believing that loving capitalism = loving corporations (or that liberalism = love of government, for that matter), it would take an immense amount of re-education and a fresh and successful political movement to even stand a chance of any reform in the right direction. The Keynesian system brings out the worst in both state corporatism and socialism at the same time and puts the whole populace in a mindset that distrusts the logic of laissez-faire.

I don't know of any recommended reading other than to say read the classical liberal classics. Adam Smith, David Ricardo, Thomas Paine and such. Those guys hated corporations and loved free markets. Modern reading is too orthodoxical - the left makes strong anti-corporate arguments but gets tied up in a distrust of private markets while the right makes a strong defense of free markets but get too defensive of corporations as necessary actors. Maybe someone else has a suggestion?

|9.24.08 @ 11:01PM|#

just asking:
You blew right past his central point.

If the government literally CAN'T influence things in the corporation's favor, then throwing money at it is useless.

Of course, with a monopoly on force there's *technically* nothing that the government can't do, but it's powers are limited by laws and courts. If the government was not legally granted the power to do certain things there would be a much higher hurdle to get over to get any benefit, and hence a much higher cost/benefit ratio. You would not only have to get a line item, but an entire regulatory structure passed that empowers the government to do the things that you want. It would take longer and cost more money.

I know of NO free marketeer who would even suggest that "no real capitalist would do that". I don't know where on earth you could have gotten that impression. I suspect you just made it up. The argument has ALWAYS been that government's powers should be limited precisely to reduce the incentive to corrupt it. You're clearly not familiar with the actual arguments made by libertarians.

Finally, the regulatory structure we have now was NOT created by capitalists seeking to influence government to create it. It was created largely by FDR and other social democrats who were attempting to set up an egalitarian system of wealth transfer. It remains those same social democrats who continue to seek an expansion of government power to regulate the economy. Big Business generally isn't out there demanding new regulatory apparatuses.

Nick|9.24.08 @ 11:28PM|#

"the regulatory structure we have now was NOT created by capitalists seeking to influence government to create it"

No, but the reciprocal structure of corporate subsidies, welfare, exemptions, political favors, protections, etc. was created by corporations via influence of government. In my opinion, big corporations and big unions are almost (but not quite) as much an enemy of freedom as big government is, as they wield a great deal of control over government policy and are able to initiate force via that power. Libertarians would have reached the Left long ago had they recognized this fact and advocated corporation-free laissez-faire as the alternative.

Nick|9.24.08 @ 11:36PM|#

"The argument seems to be that their failures would cascade by causing a run on the banks, or by freezing the credit market. But that's premised basically on the assumption that everyone's going to behave irrationally."

Yes, people DO behave irrationally when markets begin to cave, leading to the full collapse. Just look at fuel prices when everyone fills up right after economists warn about the likelihood of upcoming rationing and prices through the roof, thus creating a self-fulfilling prophecy. No one wants to be stuck in 1929 again, so everyone will look shortsightedly and act selfishly - not that this is irrational, but it does severely affect the market and can lead to a collapse of capital if overdone.

|9.25.08 @ 12:00AM|#

Theresa,

You say,"You would not only have to get a line item, but an entire regulatory structure passed that empowers the government to do the things that you want. It would take longer and cost more money." I was taking more of a long term view on this point. Think, for example, that America is around two and a half centuries old. I'm not saying that some 'corporate fat cats' are just gonna buy you're laissez-faire government in a day, but that in the lifetime of a country it could be argued that there would be some kind of entropy towards that direction. Again, the only reason I think that is because, well... it happened.

When it comes down to it, I may just be pessimistic. People keep telling me that if we just made a system where the government CAN'T do this, that, etc... then we would be fine. What I'm saying isn't that they should or shouldn't, they just DO. Wether you like it or not.

As for your other comment:
"I know of NO free marketeer who would even suggest that "no real capitalist would do that". I don't know where on earth you could have gotten that impression. I suspect you just made it up."

I'm currently around page #700 in Atlas Shrugged. Now I don't know if I'm stepping on any toes lumping the "Objectivists" with "Libertarians" and/or "Free Marketers", but this is ALL OVER Atlas Shrugged. All of the people eschew 'the looters' and avoid 'the boys in washington' because titans of industry aren't the 'kind' to do that type of thing. They have railroads to build and steel to forge. So since they believe in Objectivism, not only are they somehow inherently intelligent and attractive(?), but are also supremely principled. Maybe it's just that I haven't finished reading the book, but Dagny Taggart would never even step in Washington. Right?

There's this image of people who wouldn't take a handout from the government if it came wrapped in a chocolate blowjob- because they earn their money, gersh dernit! I also believe there are bootstraps and 'gumption' involved in this equation.

I would also like to cede you some ground, however. Corporate interests aren't the ONLY thing that drives expansion of government. It is completely reasonable that the use of social programs such as the new deal make it all the more tempting to see government as some inherent solution to other things. There are many things at play here, and I wouldn't want to hitch the blame solely on Wallstreet.

perilisk|9.25.08 @ 1:04AM|#

"Paul is absolutely correct, this is a market correction that would be expected in a free market system. In the libertarian world the free market punishes stupidity with failure. But there is a problem with this model. The CEO's of these corporations are not punished, they leave the ruins of the business with a lot of wealth even if they don't get their package. For the CEO and his cronies there is no consequence for failure. Problem two is that there are a lot of people who have lost a lot of money and are pissed of about it. In the Libertarian dream world people supposedly learn from their mistakes and go on. In the real world they blame someone for deceiving them, particularly if they were not directly involved with the situation and got hurt anyway. They follow the demagogue that finds a scapegoat and promises them retribution. You don't get more freedom from the boom and bust cycles of a libertarian economy, you get Mussolini."

Aren't limited liability corporations inherently un-libertarian anyway? The policy probably makes the economy more productive, but it doesn't necessarily increase economic "liberty", and isn't even really possible without a central power to recognize such organizations and mandate restrictions on tort proceedings throughout the nation. Were it left to pure contract law, the company would have to not only get every customer, employee, creditor, and supplier to agree to limit its liability, but also every random citizen or noncitizen that could possibly be damaged by them and have a legitimate right to bring suit.

More to the point, and in line with the principal agency arguments put forth elsewhere, a substantial amount of capital in our society is nominally held by people who exercise little control over its use, and don't even expect to see dividends from ownership. Although it's similar to traditional capitalism (by which I mean mixed-economies with a skew towards private ownership and free trade), there are also substantial parallels to Communism (as practiced); nominally, The People owned things, but practically, The Party controlled things and thus were able to acquire the lion's share of the benefit. Nominally, The Investors own things, but practically The Regulators and The CEOs control them.

"I'm currently around page #700 in Atlas Shrugged."

Masochist. I made it to page 2.

|9.25.08 @ 1:46AM|#

I do laugh at what is happening. The people who got filthy rich beyond your and my comprehension in the last 15 years are the same people who are being bailed out with $700 billion of newly created money: Bankers and corporations related to the banking system. They are smarter than fuck when it comes to using governement to pick our pockets to make them wildly richer than even their fathers, who did the same thing to our fathers and mothers. They are the corprate royalty. You don't believe in class distinctions? They do and you are stupid.
While they are at the opra with their trophy wivies, you are at home wondering how to pay for health care and how to train your soccer team to shoot accurately. They are going to redouble their holdings with this $700 billion corporate welfare check and continue to think of you as unworthy pesants, as any special people would towards the common serfs of their world, like you.
I am not a Marxist for sure. I've been a libertarian for 35 years. But Marx was right that there are classes that act in their own interest. Our problem is we don't see it. We respect wealth too much. We think coporations are okay--even though they are government creations. Wealth is not always earned--Kings, princess and the children of insurance mogules--look at government. Old money uses government everyday to make themselves richer than even their daddies were, especially bankers and insurance companies like AGI. You people are to stupid and to cowardly to do anything about it.
Suck it up peasant. And never try to leave the feifdom or else. And by the way, the current crisis--its because poor people got loans to get the chance to "own" their own homes. The rich, powerful bankers and insurance companies are innocent victims who deserve $700 billion in their pockets. LOL.

|9.25.08 @ 3:35AM|#

This is the article ive been looking for to show people that the current financial crisis isn't because of capitalism, but because of corporate government dependance. Thank you

|9.25.08 @ 10:33AM|#

this is bullshit on stilts! libertarians will scratch and claw to deny reality.

1. the realities of bureacracy are not distinctly the work of "federal" planning. They are endemic to liberal capitalism, to both the "private" and "public" realms. Max Weber 101. And they're here to stay....dont dream away reality by wishing for the return of the 17 century economy....Huge structures of power exist, and the problem today is that they are indeed "too big to fail."

Sean W. Malone|9.25.08 @ 11:01AM|#

You know GB... that'd be much more convincing if you, much like everyone else who keeps using those terms would actually quantify that statement. Especially within the context of a trillion+ dollar bail out (coming on the heels of another 500 billion at least) coming from a government that runs a half a trillion dollar a year deficit and can't afford a pair of shoes up-front without borrowing money - I'm pretty sure it is you and the TBTF crowd who are denying reality.

As one of the earlier posters said: "Show your work"...

Other wise everything you say is not much more than blind assertions that have about 0 validity.

|9.25.08 @ 11:22AM|#

ha! work to show? ever take a political science class? Ever hear of Frederic Winslow Taylor or Henry Ford or Thomas Friedman? Enron? haaaa!! The "rationalization" of business management is nothing new, please...Banking and financial sectors are the epitome of bureaucracy, mindless paper trails, and unaccountaibility.

To crusade for individual freedom and not go after "private" concentrations of power and wealth is fraudeleant and ideological...it also promotes petty middle-class bourgeouis mindsets of markets, money, and mall culture..liberarians are not radicals...farfrom it.... ....

|9.25.08 @ 11:49AM|#

just asking:

There are some significant distinctions between libertarians and objectivists, but anyway...
The point of Rand's book is not to suggest that "real capitalists" would never rely on government. After all it's Rearden's business enemies who are relying on government to force him to supply them with his products at below market rates.

The point is to illustrate the stifling effect that government can have on innovation, as well as the way it forces even principled individuals to play the game. That is, Rearden gets screwed because he *doesn't* spend his time manipulating Washington, while his business enemies DO. And if he wasn't so determined, he would have closed up shop, and his new alloys would never have been developed.

In an environment where Washington influence can make or break a competitor or a business, industry has no other choice but to pay lobbyists in DC, just to protect themselves.
Ultimately that stifles innovation because the winners are no longer determined by the best products, but by who can get the best protections from the state.

abu hamza|9.25.08 @ 11:55AM|#

question 1: where were the rating agencies like 2 years ago, when a lot of the ARMs started ballooning and borrower defaults piled up? why didn't they downgrade the securities based upon those collections of mortgage loans?

question 2: any company board considering an asset or debt acquisition of this size would perform months of grueling due diligence. Isn't it just bat-shit-zany that the taxpayers are asked to just accept this bailout in one week?

|9.25.08 @ 12:49PM|#

Nick @10:50pm

Excellent post!

Theresa,

I suspect you're right regarding I-banks getting hurt much more than the "little guy" by these banking failures.

|9.25.08 @ 12:57PM|#

This extremely well written article raises an serious question. Where was Reason when Ron Paul was trying to to educate the broad American publc about exactly the same issues? Answer: Reason was stabbing him in the back with cockamanie discredited b*llsh*t about racism. Libertarians could have worked together to inform as many Americans as possible about these critically important issues. But Reason blinked.

When you do everything to ensure that only a few self-selected readers receive this excellent message, you are engaging in ivory tower thinking that changes nothing. *Nothing.*

|9.25.08 @ 2:14PM|#

Theresa --

... government's powers should be limited precisely to reduce the incentive to corrupt it. Exactly - and very well said.

Just --

This issue goes beyond just influence and corruption on the part of legislators. It also involves the courts (which exacerbate the problem by broadly interpreting the powers granted to Congress). So as we continue down the road of promising (and giving) more government benefits to more and more people (and businesses), we continue to corrupt the entire system.

What we end up with (and are indeed ending up with) is not a free market at all; it's a quasi-socialist or redistibutionist economy with diminishing freedom and liberty for individual participants.

By the way, when you're done with Atlas Shrugged, pick a copy of Alexis de Toqueville's book Travels in America (I may have the title wrong), written in the 1840s. He predicted way back then the perils of allowing the people who are the ultimate beneficiaries of government largesse to be the ones who get to vote in the ones who grant it to them.

|9.25.08 @ 5:15PM|#

I always did like this speech.

"Good evening,[America]. I thought it time we had a little talk. Are you sitting comfortably? Then I'll begin... I suppose you're wondering why I've called you here this evening. Well, you see, I'm not entirely satisfied with your performance lately... I'm afraid your work's been slipping and... and well, I'm afraid we've been thinking about letting you go. Oh, I know, I know. You've been with the company a long time now. Almost... let me see. Almost ten thousand years! My word, doesn't time fly? It seems like only yesterday... I remember the day you commenced your employment, swinging down from the trees, fresh-faced and nervous, a bone clasped in your bristling fist... "Where do I start, sir?", you asked, plaintively. I recalled my exact words: "There's a pile of dinosaur eggs over there, youngster", I said, smiling paternally all the while. "Get sucking". Well, we've certainly come a long way since then, haven't we? And yes, yes, you're right, in all that time you haven't missed a day. Well done, thou good and faithful servant. Also, please don't think I've forgotten about your outstanding service record, or about all of the invaluable contributions that you've made to the company... Fire, the wheel, agriculture... It's an impressive list, old-timer. A jolly impressive list. Don't get me wrong. But... well, to be frank, we've had our problems too. There's no getting away from it. Do you know what I think alot of it stems from? I'll tell you... It's your basic unwillingness to get on in the company. You don't seem to want to face up to any real responibility. To be your own boss. Lord knows you've been given plenty of opportunities... We've offered you promotion time and time again, and each time you've turned us down. "I couldn't handle the work, Guv'Nor", you wheedled. "I know my place". To be frank, you're not trying, are you? You see, you've been standing still for far too long, and its starting to show in your work... And, I might add, in your general standard of behavior. The constant bickering on the factory floor has not escaped my attention... nor the recent bouts of rowdiness in the staff canteen. Then of course there's... Hmm. Well, I didn't really want to have to bring this up, but... Well, you see, I've been hearing some disturbing rumors about your personal life. No, never you mind who told me. No names, no pack drill... I understand you are unable to get on with your spouse. I hear that you argue. I am told that you shout. Violence has been mentioned. I am reliably informed that you always hurt the one your love... the one you shouldn't hurt at all. And what about the children, its always the children who suffer, as you're well aware. Poor little mites. What are they to make of it? What are they to make of all your bullying, your despair, your cowardice and all your fondly nurtured bigotries? Really, its not good enough, is it? And its no good blaming the drop in work standards on and management either... though to be sure, the management is very bad. In fact, let us not mince words... The Management is terrible! We've had a string of embezzelers, frauds, liars and lunatics making a string of catastrophic decisions. This is plain fact. But who elected them? It was you! You who elected these people! You who gave them the power to make your decisions for you! While I'll admit that anyone can make a mistake once, to go on making the same lethal errors century after century seems to me nothing short of deliberate. You have encouraged these malicious incompetents, who have made your working life a shambles. You have accepted without question their senseless orders. You have allowed them to fill your workspace with dangerous and unproven machines. You could have stopped them. All you had to say was "No". You have no spine. You have no pride. You are no longer an asset to the company. I will, however, be generous. You will be granted two years to show me some improvement in your work. If at the end of that time you are still unwilling to make a go of it... you're fired. That will be all. You may return to your labors."

JMR|9.27.08 @ 5:01PM|#

When future government welfare cases anticipate said welfare, it's NOT a case of "market failure," it's more like "moral hazard." If you don't get your terms & thinking straight, the antilibertarian media bias & propaganda will overwhelm your brain.

And good job as usual Radley. I've sent this to some people who need to see it, but sadly, far too few to matter.

|9.29.08 @ 6:23PM|#

If evolution used the interfering tactics that the United States Government uses with the free market, the wonderful life forms that we see today would never exists.