The Bias of Capitalism

How do you feel about providing a cash bailout to companies whose leaders have been short-sighted, at best, and criminally inept, at worse, and which support a large block of people who look out only for themselves, and want to grab as much money as they can?

Fahgeddaboutit, right?  Those auto companies don't deserve a dime of taxpayer money.

Only I'm describing Citi and the other consumer-facing financial institutions that are lining up to get handouts worth $750 billion (and climbing). 

Think about it for a minute: over the span a weekend's worth of closed-door deal-making, Citi made off with $20 billion outright, and guarantees for $300 billion of its worst loans.  Companies like American Express are falling over themselves to get qualified as "banks" so they can share in the largesse.  AIG got $75 billion in little more than a week, and did nothing more than appear (and be) pitiful.

Contrast that to the heat Detroit's automakers have been getting for having the audacity to ask for help:

• Legislators demanded specific plans, as if they had the savvy and insight to decide if the automakers had the capacity to run their companies 
• A steady stream of negative publicity has focused most often on the stupidity of making SUVs, and on the terribly selfish (if not outright oafish) unionized workers who've caused the problems. 

Bailout?  Yeah, right.  I think we've all pretty much concluded so far that the legacy US automakers don't deserve it.

But Citi does?

The argument for saving Citi (or AIG, or Freddie, or Fannie, yadda yadda) is that they're too big to fail...if a major consumer-facing financial institution went bust, it could trigger a run on the banks.  200 million savers and investors could be impacted by Citi's failure.

This is a marvelously circular argument, as the natural conclusion is that no financial institution can be allowed to fail, as each feeds into the system (Lehman Bros had little consumer relevance, so it was discarded).  "The Market" is a thing that exists beyond time, place, and the laws of causality, and we need to help and protect it, even as we can't quite point to what or where it is (Stocks?  Mortgages?  LIBOR rates?  Small-business loans?). 

The logic also makes serious moral value judgments about the nature of capital versus labor.  

• Investors can chase the highest returns possible, even to the point of embracing (or willfully ignoring) serious risk, but they're not guilty of the same selfishness as that of union workers who negotiate for the best possible contract terms.  Shouldn't self-interest be self-interest, whether shown by union workers getting the best contract deals, or investors chasing the highest interest rates/returns? 
• Once an investor/depositor has an asset, it's a sacrosanct obligation to honor and reward that capital (with more capital); wheres a worker who spends a lifetime building assets for a company in exchange for retirement health care is an "onerous liability" that unfairly impedes said company's competitiveness?
• The dependencies of capital (one bank lends to another while borrowing from a third, multiplied a zillion times over, all around the world) are core to the very fabric of our way of life, while the dependencies of people, suppliers, manufacturers, and the communities they both enjoy and support...well, those aren't so important in this global marketplace of ours?

So it's with straight faces that Congress can demand plans from the automakers to fundamentally rethink their entire operations, from what they make, to how they pay their employees and vendors.

But no such radical plan will be forthcoming from Citi, or any other financial institution benefiting from the bailout funds.  There are no alternatives to the absolutes of Captialism, and their failures have been deemed failures of judgment and execution, not fundamental principles or practices.  All they need to do is revise their tactics, while the automakers need to rework overall strategies.

There's a bias here to the presumptions of Capitalism, and I think it clouds our ability to see and understand what’s really going on. 

It's why we hear a lot about "fiscal stimulus" and tax cuts vs. job creation.  And judging from the toxic nonsense around using the word socialism during the Presidential campaign, we're not about to start talking about our problems any differently. 

There's a branding lesson here, somewhere.

Comments

[BIG Kahuna]

The other day I said I was actually embarassed to be an American. What the heck happened to capitalism? These banks should be forced to go under like any other business and let new banks replace them. Why is any business too big to fail?

We're in for very troubling times.

[demosthenes]

Well, as the son of a lifelong UAW member I'd say the automakers problem getting loan guarantees or other financial support has more to do with them a.) being late to the latest round of the game and b.) being completely tone-deaf in their public relations. 3 guys taking (and believe me, I know how nice they can be)private jets to a political hearing where they're asking for public money is just asking for abuse.

As for the capital markets and the need for the Federal Government to step in and be the backstop for the financial system, I disagree with you. It's part and parcel of what they do. Political goals and requirements have long been institutionalized in the financial system (home ownership = good... more home ownership, whether or not you qualify by "traditional" loan standards also = good, so financial companies are encouraged and incentivized to expand into non-traditional areas.) btw this initiative worked to the extent that entirely new socio-economic classes of people got the chance to own the roof over their heads.

The markets, left to their own devices, are brutal and often act in ways which are, at least in the short term, contrary to the social good and cause great damage to innocent bystanders. Furthermore the public's mood greatly resembles that of your average manic/depressive and the trampling of the unruly mob ALSO greatly damages innocents.

The government moderates the swings, regulates, and, where necessary, acts as a guarantor and brake to ensure that financial system holds together so there can be more good times when the bad times finally end.

Of course, along with that money comes penalties, restrictions on compensation (greed = bad) and the modern electronic stocks wherein all the greedy bastards who weren't smart enough to step off the carousel before the music stopped get pummelled by the latest group of populists eager to lead a public lynching.

This is not to say that each one of these programs is wise or a good decision or that a good public caning every now and then isn't helpful, it's just to say the government is doing what they should be doing, to the best of their availability.

Regards,

Charlie