The Weekend Capitalism Died

The first thing I thought of when I heard of the Government takeover of the Mortgage GSEs was: “Is American style capitalism dead?” Can we claim to have a free market, lightly regulated economic system when our government steps in (with taxpayer funds no less) to back-stop the risk created by irresponsible corporate managers? Does capitalism even exist in an environment where companies above a certain size are deemed too big too fail, and can always count on some sort of government intervention?

While removing risk from the equation may be appealing to some, risk is what guides capitalist activities, allocates capital effectively, separates the wheat from the chaff, etc, remove risk from the equation and capitalism dies. American Capitalism may have died this day as the government has sent the message that companies over a certain size will be prevented from failing, and set the economic policy goals of removing risk from capitalism, to impede natural economic cycles and to do whatever it takes to prop up the economy/avoid economic downturns.

The actions of the government in this situation could be the beginning of a form of “pseudo-socialist-capitalism ” where we abandon the concept of free markets, and instead try to use the government to prop up the economy in a fashion that is reminiscent of children’s soccer games where neither team loses.

Another issue is the sheer lack of Accountability on the part of the executives and politicians whose job it was to steer the mortgage GSEs in the right direction. Despite nearly unleashing an economic weapon of mass destruction on the global economy (let alone the domestic one), they will not face any significant penalties aside from a few top executives losing their jobs whilst probably keeping all of the bonuses received, salary, separation packages, retirement benefits, etc.

Mind you there are plenty of losers in situations like this, people have lost their jobs, shareholders may not have been 100% wiped out but the journey to this point wasn’t pretty, etc, etc, but the people at the helm of this disaster will not face any significant penalties and will keep the benefits generated by the very actions that caused this situation.

If a situation where corporate managers can act like gamblers that can only win but never lose isn’t the definition of a moral hazard, than I don’t know what is.

Another issue is that if the government is to assume the role of “protecting the economy” from the risks imposed by various companies failing, then it should take the necessary steps to offset that risk by better monitoring & regulating business activities that could lead to a bailout in the first place.

“You can’t have your de-regulation and eat your near penalty free bailout cake too”.

It’s patently fatuous to have an economic policy that says that certain companies can’t be allowed to fail, while simultaneously allowing irresponsible managers to run amuck and create the need for the bailouts in the first place.

Moving forward Detroit is asking for billions in Government sponsored loans, and there is a strong likelihood that there could be retail and/or investment banks that require bailouts as well. Where will it all end? How will a government that cannot afford to pay its pending liabilities for debt, social security, Medicare, etc, afford to prop up the economy via regular intervention and bailouts? Where does the dollar go as the cost of these actions begin to hit the national balance sheet?

How long before our government needs a bailout of its own?

Finally what do these actions say to the average person who is struggling with their own financial issues? You can’t get a government bailout for your own expenses because it’s not posing a big enough risk to the economy, but we’re going to take your tax dollars and bailout someone else whilst letting irresponsible managers keep their bonuses?

Perhaps the biggest problem here is that the average citizen has zero awareness of what just happened, Capitalism died this weekend and no one noticed.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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