The moral imbalance of bailouts
When Hurricane Ike hit Texas, the government, acting on our behalf, offered bailouts to the thousands whose homes — built in risk-prone areas — were damaged or destroyed: payment for hotel rooms, aid in rebuilding. But when your neighbor’s house burns down, she gets nothing from us. She gets help only if she has paid for insurance. If that same neighbor gets cancer, she’ll also get no help from us unless she or her employer could afford insurance.
But the government is — we are — bailing out banks that risked too much on bad investments. By buying time, the bailout could also give a lifeline to people who borrowed too much on their homes. If the neighbor lady overmortgaged herself with a now-toxic loan, she might get a break. But if that neighbor lady defaults because she has cancer and has to pay her medical bills before her responsible 30-year, flat-rate, well-documented mortgage, well, she’s out of luck.
Perhaps every sick person without insurance should march on Washington to show that they’re a big disaster, too. Perhaps they should add up the impact of their illnesses on the economy to prove their financial weight. To expose the moral relativism of our collective national view of tragedy and obligation, maybe they should put up signs on their homes and wear badges that say, “Bail me out.”
In today’s NY Times, Floyd Norris argues that it’s worse than that, for the government is bailing out the most irresponsible offenders who put themselves and the economy at the worst risk. Lehmann wasn’t so bad, so it got nothing. Fannie Mae, Freddie Mac, AIG, and those teetering now will get saved in some form because of the greater impact of their greed and irresponsibility.
Lehman did not measure up because its chief executive, Richard S. Fuld Jr., simply was not reckless enough as he ran Lehman into the ground.Had he had the foresight to make a lot more bad bets in the derivatives market, the government would have feared financial chaos and might have nationalized Lehman, just as it nationalized A.I.G., Fannie Mae and Freddie Mac. Or it would have subsidized a takeover, as it did for Bear Stearns.
The Paulson-Bernanke Doctrine is not “too big to fail.” It is “too reckless to fail.” If you get your company into enough trouble to threaten the financial system, Ben Bernanke, the Federal Reserve chairman, and Henry Paulson, the Treasury secretary, won’t let you collapse.
The problem for those left holding the bag — us — is that we have no leverage ourselves to demand conditions in return for our involuntarily generous rescue. Before any bailout is agreed to, shouldn’t our representatives demand responsible regulation in the future and repercussions for irresponsible management in the past — or, for that matter, demand a new look at our national priorities (helping out that neighbor with her cancer and her foreclosure)? No, it’s an emergency. We need decisive action to avoid disaster. No time for that. Of course, we could have avoided this disaster with responsible regulation and management in the past.
I believe in the market but I also believe that government must decide when to regulate just enough. (That is the essence of why I am a Democrat.) Our government has failed us and will continue to, I fear. What we need is a new moral scale. If you put yourself at risk, it is your responsibility to protect against that risk. If you put the rest of us at risk, then you will suffer the consequences but we will have sufficient oversight, demanding sufficient transparency to try to stop you from doing harm. If fate deals you a bad blow, then we need a structure to help protect you (that is, health insurance is just as great a national obligation as after-the-storm and after-the-fall bailouts).
Tags: finance
September 19th, 2008 at 9:19 am
RE: Buzz Machine- I agree- I feel terrible for the families that lost everything to the hurricanes- but at the same time- I don’t have a house on the coast, and I don’t feel it is the responsibility of the taxpayers to rebuild yours. Katrina and Ike left many displaced, and pehaps for the better. NOLA is nearly 20 ft below sea level, so, maybe its not a good idea to LIVE there… if you take assistance from the government then you should have to move to a safer area. Hurricanes are responsible for a great deal of the economic prolems we see today, as insurance companies operate on risk- so does wall street. Its not entirely unlike gambling. I know people who bought into the interest only loans and moved into expensive houses they could not afford, and it is not the job of every person who had enough sense not to overspend to make your housepayment! Life is about choices- good or bad, there are consequences. Individual responsibility has to come into play at some point, or America becomes the spoiled rotten child that everybody hates to be around- and we are well on the way already.
September 19th, 2008 at 9:20 am
The actions of the governement with AIG, Fannie and Bear are better described as “take-overs” than “bailouts”. The existing shareholders (the owners) were almost entirely wiped out and the executive management was removed. Even the senior bond holders will be second in line to the U.S. Government when collecting.
While we should never have gotten into this mess in the first place, the Treasury and the Fed are right to be taking actions now to shore-up the system. Will this come back to bite the taxpayers? Possibly, depending how these distressed assets aultimately recover. But a meltdown would have had an even more significant impact on us, the taxpayers, with longterm repercussions on the economy and the financial system. A regulatory schema for preventing this from happening again is clearly required - to wait until that is in place before acting on the current crisis would be foolish.
September 19th, 2008 at 9:38 am
Finally, Jeff, you are starting to understand that we don’t have a “capitalist” economic system in this country. We have a corporatist-syndicalist system similar to what Mussolini tried to create.
This is where there is an alliance between big business and government where each helps the other and the working man is kept without political influence. In Italy the alliance explicitly went after the strong labor, socialist and communist movements. This lead to the widespread civil rights abuses and the eventual alliance with Germany.
In the US, the government has not (yet) resorted to violent suppression of worker’s rights, instead we have had 40+ years of union busting through rewriting of the laws, outright abuses and a propaganda campaign promoting the idea that individualism rather than belonging to a community is the ideal.
It is only when the cronyism reaches a crisis that the degree of interdependence between government and big business becomes apparent to all. In more normal times the tax breaks, subsidies, trade policies, and environmental and safety law changes slip through without much notice.
Regulation will be imposed and big business failures will be covered by the tax payers, but then the cycle will just start again. Capitalism has this as an innate feature - one can go back to the tulip craze or the South Sea bubble to see this.
What is becoming different now is that the idea of unlimited growth that is the basis of capitalism is coming under scrutiny as the world moves into an era of resource shortage. I claim that capitalism will not be appropriate for such a condition.
Here’s my 2 cents on the issue:
http://robertdfeinman.com/society/capitalism_must_die.html
September 19th, 2008 at 9:51 am
Amen Jeff, amen. It’s my great hope that the internet is what levels this playing field.
September 19th, 2008 at 10:13 am
You say: “I believe in the market but I also believe that government must decide when to regulate just enough. (That is the essence of why I am a Democrat.)”
I agree, but I see that Obama ranked 2nd in the amount of donations he received from Fannie and Freddie … that doesn’t bode well for change or ‘regulations’.
Also, while I agree with Obama’s call for changes in regulations, such as increasing reserves that banks have to hold; this position was originally put forward by Bush appointees: Bernake and Paulson, and opposed by Democrats like Dodd.
Alas, we’re left with 2 really unaccountable parties, BOTH ON THE TAKE … if you think otherwise, you’re likely just rationalizing your position by choosing data points to make you feel comfortable with the position you’ve chosen. Don’t get me wrong, everyone does it!
September 19th, 2008 at 10:22 am
… and one more thing … how can Obama defend giving taxpayer backed loans to US auto companies. I know, he’s claiming it’s to help them conform with CAFE compliance … but I don’t see any Japanese, Korean or German automakers asking for handouts? Yet these manufacturers together employer hundreds of thousands of Americans in the US.
It’s just another tax payer funded corporate handout … it’s indefensible for AIG nor for GM … and he calls this Change?
September 19th, 2008 at 11:56 am
[...] The moral imbalance of bailouts (by Jeff Jarvis) When Hurricane Ike hit Texas, the government, acting on our behalf, offered bailouts to the thousands whose homes — built in risk-prone areas — were damaged or destroyed: payment for hotel rooms, aid in rebuilding. But when your neighbor’s house burns down, she gets nothing from us. She gets help only if she has paid for insurance. If that same neighbor gets cancer, she’ll also get no help from us unless she or her employer could afford insurance. [...]
September 19th, 2008 at 3:09 pm
it’s hard to object to the government’s mass bailouts as similar debt-producing methods were put into action to bring the U.S. out of the Depression… our economy has been supported and driven by debt ever since
September 19th, 2008 at 4:55 pm
When I was editor of the Anchorage Daily News, I constantly wondered about the expensive rescues the government mounted to pull climbers off McKinley or elsewhere after their grand adventure went sideways.
Not sure, but I think those rescued nowadays get charged.
Seems like a lesson there.
September 19th, 2008 at 7:47 pm
I sure hope they get charged for their rescues because I got pissed when I saw that people on the coast were having hurricane parties. Others stayed becuase they were stubborn and/or wanted to “protect” their homes. I hope my tax dollars aren’t rescuing idiots.
September 19th, 2008 at 8:59 pm
Mountain climbers pay for rescues. What about all those fancy houses on the Atlantic Coast? How about the homes on Fire Island? Should we bail out those millionaires when their houses slide into the sea?
September 20th, 2008 at 8:00 am
It’s a sad day in America, however, let’s get down to basics. When you look at just one of those subprime loans, you know it’s a disaster waiting to happen. Now, multiply that by 3.5-million.
Bottomline, very smart people knew this would happen a long time ago.
And here’s some even worse news, it’s gonna get worse — credit card debt, U.S. auto manufacturers, healthcare system … just like the investment banks were built on a house of cards, so is the US government.
As Thomas L. Friedman like to say about the environmental movement, “We’re having a party.”
Ah, what a hangover it’s gonna be. Pass the Exedrin please.
September 20th, 2008 at 10:40 am
You make very good points, and you are right, bailouts are inherently unbalanced and immoral, because they absolve the misfortune or irresponsible choices of a few and lay the consequences squarely on the shoulders of the many - and all of this happens involuntarily - by government mandate. Our only legal choice in this process is our vote.
However, I think your conclusion that the “right amount” of regulation is the answer is fundamentally flawed. The problem with that idea, is it relies on the assumption that an imperfect and self-interested government made up of imperfect and self-interested elected people and the imperfect and self-interested bureaucrats who work for us are capable of determining the “right” amount of regulation. This is an impossible hope.
Regulation, in addition to the greed and dishonesty, helped get us where we are today. For example, it is not possible for a group of bankers to understand “the right interest rate” for any given period in economic and market activity. Theses powerful decision makers are not omniscient nor immune to political pressure, and thus their decisions place artificial controls on the market and will naturally lead to distortions in market outcomes. And yet, we give this power to the Federal Reserve, a power which cannot be centrally ordered without negative and damaging consequences.
Another example is the power of the big ratings agencies, which are supposed to give investors and consumers unbiased and unmanipulated information about the health of a corporation or creditor. These ratings agencies have had an abysmal record of gauging the health of the titans of finance as they burned around them. Sometimes downgrading them only within days or hours or even AFTER bankruptcy, and yet these ratings agencies operate with the blessing of a government charter and are also constantly being pressured politically to hold a system together based on the faith of the participants.
The list of how regulation distorts the miraculous give and take of the market is endless. Everything from fiat currency to biofuel are the products of a centrally planned regulated market, as are all of the problems and negative side effects of these policies. I won’t bore everyone with a giant list in this post.
What it comes down to is this: this country is at its very foundation based on freedom, that is “certain inalienable rights.” These are rights that cannot be given by man or his governments. However, these rights can be taken by man and his governments. The unique character of the United States rests on the fact that the Founding Fathers actually recognized this divine truth, and they set up a government to protect us from the deprivation of these rights and to give us the freedom to be our best, or worst selves. They did not establish this nation simply to provide a guarantee of security and comfort.
There is no Constitutional right which protects someone from financial loss or even ruin. There is no right to a nice home when Nature destroys the one we have. There is no inalienable right to ever increasing home value or to a growing portfolio or to quality health care, or even to a secure retirement.
These are all wonderful things, and I think it is good to try to achieve them, especially in a highly developed society, but when the government tries to impose or ensure these things on a macro scale as in these bailouts or with the individual, there will ALWAYS be a loss of the individual choices and there will ALWAYS be great immoral imbalance.
To be sure, the market system does not equalize the material comfort and socioeconomic standing of the individual, but it always respects liberty.
September 20th, 2008 at 3:40 pm
If we say the government shouldn’t offer aid to people who live in “unsafe” coastal areas because of the hurricane threat, then by the same argument, we shouldn’t offer it to the midwest because of tornadoes or California because of earthquakes. And I suppose we shouldn’t offer it to forest areas either because of the wildfire threat.
As for economic bailouts, it’s dadgum frustrating to keep on doing this when the financial system never seems to learn its lessons — like from the S&L crisis. More here.
September 20th, 2008 at 4:29 pm
Well said Jeff. The US government approach, any government for that matter, to financial and natural disaster bailouts is offensive and unfair.
September 22nd, 2008 at 8:42 am
> If we say the government shouldn’t offer aid to people who live in “unsafe” coastal areas because of the hurricane threat, then by the same argument, we shouldn’t offer it to the midwest because of tornadoes or California because of earthquakes. And I suppose we shouldn’t offer it to forest areas either because of the wildfire threat.
Quite right.
And, it’s not just disasters, it’s local infrastructure also.
Moreover, the federal govt shouldn’t be paying for NYC’s subways, or the Bay Area’s BART. The Big Dig should have all come out of MA’s hide.
September 23rd, 2008 at 9:09 am
A comment on “The moral imbalance of bailouts” (by Jeff Jarvis)…
By setting up this perverse system whereby the most risky of mortgages/loans (i.e. those that showed a high likelihood of default) would be backed and “insured” by the government, we were creating an incentive for banks to loan money to people they s…
September 26th, 2008 at 11:55 am
The government should take the 700 billion dollars and instead of a bailout, simply use the money directly to create its own lending institution.
September 29th, 2008 at 11:54 am
A quick comment on Lehman — no one there (virtually no one) wanted a government intervention on their behalf. These donations aren’t free — they change forever who you are and how you operate. The traders and analysts were very happy that the government let them figure out a market fix. Or most of them would have left — being a “partner” with the government is not very fun. A lot of AIG folks are re-evaluating their careers at AIG as quasi-government employees. A pretty different future.
October 2nd, 2008 at 12:19 pm
Now that the Senate has passed the 700 billon bailout has Obamas destiny been sealed?
November 14th, 2008 at 3:16 pm
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