Overall, I’m a fan of capitalism. This is not to say that I don’t have problems with aspects of it, but it’s hard to argue with capitalism’s ability to fuel innovation. Similarly, I also generally subscribe to the capitalistic idea of removing unnecessary restrictions on businesses to aid in cultivating economic growth (e.g. deregulation), but I also recognize that, due to the associated risks, it is important to include measures of oversight to maintain the delicate balance between economic freedom and responsibility.
Deregulation has been taking a beating as of late, and rightfully so. However, it’s important to note that with deregulation, and many other similar capitalistic concepts, its successes are not always discernable while its failures are readily apparent. For example, if the removal of costly reporting requirements encourages financial gain in small businesses or a deregulated market provides for a successful and efficient merger and, consequently, the market increases, deregulation is seldom showered with praise. However, when a company bottoms-out after being exposed for cooking the books or a financial institution files for bankruptcy due to irresponsible lending, deregulation is immediately raked over the coals.
For the most part, any situation that can be regulated has corresponding advantages and drawbacks to such regulation. Phil Gramm’s deregulatory circumventing of the Commodity Futures Modernization Act of 2000, has been generally accepted as the main contributing factor to the Enron fiasco. Score one for regulation. However, in response to the Enron scandal, and its sister Tyco, Adelphia and WorldCom scandals, the Sarbanes-Oxley Act was put in place to increase the financial reporting requirements of public companies. And while there hasn’t been such a large-scale corruption scandal since its inception, one can’t say for certain, that a scandal isn’t brewing beneath the surface. What can be said for certain is that immediately after the Sarbanes-Oxley Act going into effect, the number of small and foreign firms deregistering from the U.S. stock exchange increased dramatically due to the additional cost required to comply with the act. Score one for deregulation.
It is also important to note, that in order for deregulation to be successful, it has to be implemented in a manner that keeps itself in check. Basically, the system must be set up such that businesses have the right to take advantage of loose requirements in order to acquire large gains, while at the same time being held in check by recognition of large risk. The system does not work when businesses are allowed to run free without any risk.
A week ago, Henry Paulsen stated that the Federal Government’s refusal to bailout Lehman Brothers, was due to a threat of moral hazard – the basic concept that if shielded from any risk, a company is more likely to be reckless. In my opinion, this was a fair decision due to this understandably large problem associated with government bailouts. Obviously, if executives know that their company will be safeguarded, via a government bailout, from any serious repercussions due to failed financial undertakings, the idea of chasing after lofty, high-risk ventures becomes reasonable. This is why deregulation and bailouts need to be kept separate. Deregulation provides the opportunity of high gains, while the risk of financial ruin keeps the pursuit of such high gains in check.
However, while the risk of moral hazard as been discussed in the past few days, we’re now faced with the proposal of a potential $700 billion bailout that will require raising the national debt ceiling, further dragging down the dollar, but that will not require any specific oversight or define any restrictions on executive compensation. Add this on top of the conservatorship of Fannie Mae and Freddie Mac and the rescue of AIG, and we’re sending a dangerous message. Where does it end? Does anyone really think that the government would even hesitate in instituting another bailout if Bank of America were to fall on hard times? There’s no way that the government would allow an institution that big and that important to fail.
Currently, it does seem clear that, in light of the news of companies beginning to go under due to their inability to acquire necessary loans, some type of financial assistance is needed, but it had better come with serious stipulations and specific oversight measures as opposed to its current “blank check” form. Otherwise, we need to have faith that, after being bailed out, our respectable financial institutions will, of their own accord, resist the lure of wealth and greed-laden impulses to pursue high gain/risk ventures, and instead make secure, responsible decisions…call me a skeptic…
Filed under: Economics, Politics | 4 Comments
Tags: AIG, bail-out, bailout, capitalism, deregulation, Fannie Mae, Freddie Mac, Lehman Brothers, Paulson, Sarbanes-Oxley
I think this is the biggest rip off in the history of the USA
They say if we don’t bail them (who every that is) out then we will hit rock bottm. Hell, I been at rock bottom. And you know what, when your at rock bottom you have something to stand on. And when you have something to stand on then you can stand up and make something for yourself.
FUCK A HAND OUT
FUCK A BAIL OUT
How about a free market? Is a free market a new idea? I just don’t get it.
Mad as hell about government and it giving away my hard earned money.
Mike
As usual, I tend to agree with you. Generally speaking, I believe in a free market approach to things. However, even the great bastion of capitalism Adam Smith stated, “[E]very man, so long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with any other man.” Notice the “so long as” phrase — so long as he does not violate the laws of justice.
Here is where I think the judicial branch of government could do just fine without further government regulation, i.e., tort reform or, more accurately stated, corporate welfare. In no other place on the planet does a consumer get to stand on equal footing with a multinational corporation than in a court of law. There was a time when shareholders could keep boards of directors and officers somewhat in line by bringing shareholder lawsuits. Once those rights were gutted, we got Tyco, Adelphia, Worldcom, etc. Put another way, our forefathers laid out a pretty good juxtaposition between free market principles and the three branches of government. If courts could do their job without being hamstrung by industry-bought legislation protecting corporate greed, we wouldn’t now need a bailout.
I’m not oversimplifying the situation and asserting that lawsuits would have saved AIG. I’m saying the evisceration of shareholders’ rights against mismanagement is one of the straws on this camel’s back. Put another way, if Congress and the President would stay out of the way most of the time and let the equal branches of government truly be equal, we could avoid a lot of this mess. As it now stands, we have Congress and the President trying to solve problems they helped create.
So, what’s your take on the potential nationalization of banks? (j/k.) Having being raised in the same household as you, I have a strong streak of fiscal responsibility. How many people do you know that have a savings account? In my age bracket, I know this many.
zero.
Think about that. That is a major problem. We were due for a major change in our economic culture, and I think we’re getting that.
The problem is, how do you justify letting people that have behaved responsibly take the fall?
Governments create the money of a country. There is no one else in a modern society capable of doing that. It is long overdue that the government should not only control banks – something they already do but should provide them with guarantees. They must regulate every aspect of their activity. The government makes the laws that govern banking practice and accounting principles. The banks stand as the distributors of the money the state creates.
But Wall Street and the investment bankers are in my opinion also trying to get into the “creation of money” business by using the dubious tools of derivatives. The Federal Government is probably going to have to take a much stronger hand and define the scope and legitimate structure of derivatives. They cannont allow money to print itself as it were. Derivatives are like that. People may not be stupid enought to “buy the Brooklyn Bridge” but many are apparently willing to try to buy the traffic that croses it every day.