Tag: bailouts

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free trade & free markets moral hazard

Is It Still Capitalism?

capitalism, mixed economy, socialism, corporation, bank

Is it still capitalism if the capital is guaranteed?

“The U.S. government will guarantee all customer funds in Silicon Valley Bank (SVB) after a series of bad decisions and a run on deposits led to the bank’s collapse,” explains Elizabeth Nolan Brown in Reason. 

Technically, the bank isn’t being bailed out. Its customers are. And that’s a lot more popular than bailing out banks directly. There are more bank customers who vote than bankers who vote — though there is probably more political donations from banks directly seeking banking policy “correctives” than bank customers doing the same. That’s almost apodictically true.

The most bizarre element? While the FDIC, the federal agency that insures depositors of this and similar banks, is designed to guarantee depositors’ capital up to a certain limited amount ($250,000, more or less), the regulatory triumvirate of Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chair Martin Gruenberg declare that “all depositors of this institution will be made whole.” 

All.

Even the super-rich.

The key concept, here, is moral hazard — “The decision creates bad incentives for financial institutions and their customers” is how Ms. Brown puts it. We’ve been through all of this before. Is there really any question? The answers are in.

So, to the opening, Is it still capitalism if the capital is guaranteed? — if even Prince Harry’s fortune will be guaranteed — the answer is No.

Sorta. 

It’s a special kind of capitalism. State-​dominated capitalism; Neo-​mercantilism; f***-ism. Use whichever term.

As we contemplate a profit-​and-​loss system without loss, and how the losses will be made up within the financial system, just remember that the federal government playing the role of Savior is not itself costless, and … its debt keeps growing. And the Ultimate Result of all this still looms.

Immoral hazard.

This is Common Sense. I’m Paul Jacob.

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folly free trade & free markets meme moral hazard national politics & policies too much government

Why government is (almost) never the solution…

big government, solutions, toxic assets, bank bailout, meme, illustration, Jim Gill, Paul Jacob, Common Sense

When you systematically reward failure, incompetence and irresponsibility…what results should you expect?

Bank Bailout

QE — Toxic Asset Government Purchases

Moral Hazard

Click below to get a high resolution version of this image:

big government, solutions, toxic assets, bank bailout, meme, illustration, Jim Gill, Paul Jacob, Common Sense

 

Categories
free trade & free markets national politics & policies too much government

Preparing for a Bailout

In his 2012 State of the Union speech, President Obama declared, “It’s time to apply the same rules from top to bottom: No bailouts, no handouts and no cop-outs.”

Yes. He said that. But in reality, the handouts and cop-​outs have kept on coming, like the solar wind.bucket for bailout

A Washington Examiner editorial notes that while “Obama blasted the influence of insurance lobbyists and vowed to take on the industry … as president, he passed a health care law that funnels more than $1 trillion in subsidies to insurers, and fines Americans who do not purchase their products.”

Go ahead: call that a handout.

But what about bailouts?

While newspapers like The Washington Post insist that Obamacare is exempt from such an eventuality, there remains the part of the Affordable Care Act known as the risk corridor programs. These reimburse “insurance plans for claims that cost significantly more than premiums that new subscribers paid in,” according to The Post’s Wonkblog. The goal is to protect health insurance companies from the risks they face in the new Obamacare exchange.

Companies that make money will pay into a fund that will be used to bail out companies that lose money. But, after obvious complaints about limits, the Centers for Medicare and Medicaid Services (CMS) pushed a mandate that the program be revenue neutral, that the money paid out not exceed that paid in.

Last Friday, in 435 pages of regulations, CMS abandoned this call for budget neutrality. Instead, the regulation states, “In the unlikely event of a shortfall for the 2015 program year, HHS recognizes that the Affordable Care Act requires the secretary to make full payments to issuers.”

A taxpayer bailout: fully in place.

This is Common Sense. I’m Paul Jacob.

Categories
free trade & free markets too much government

Bailout Follies

Economic news, these days, seems to be driving home some very old economic wisdom — about foolishness.

In an essay on banking from the 19th century, a writer quipped, “The ultimate result of shielding men from folly, is to fill the world with fools.” This basic lesson — that it is dangerous to shore up bad practices with bailouts and specially tuned central banking policies — is being borne out, once again, in the American economy. Thank the L.A. Times’s sad, sad article “Forget too big too fail: some banks now too small to succeed.” The article’s blurb nicely synopsizes smaller, non-​bailed-​out banks’ plight: “Small banks are finding it increasingly tough to survive, in part because of the cost of complying with regulations stemming from the financial crisis.”

Remember that 2008’s financial implosion led to a double whammy of governmental overkill:

  1. Bailouts for the biggest fools and
  2. Regulations for everybody, including the wisest players.

The former kept the fools in place and ready to do more damage, since their folly had basically been rewarded. The latter burdens all players, but the costs are hardest for smaller outfits to bear, while bigger outfits can easily jump those regulatory hurdles.

The details of all this constitute “news,” but the principles are old (I’ve discussed them here many times). Bailouts reward the biggest fools, and regulations protect the biggest players from competition from smaller ones.

Yes, indeed, the ultimate result of shielding bankers from the effects of their folly is to fill the world with foolish bankers.

This is Common Sense. I’m Paul Jacob.

Categories
free trade & free markets too much government

Equal Bailouts?

A new Pew Report tells us that Americans think that the rich got the biggest benefits — government handouts — after the collapse of financial markets in 2008. That’s my perception, too.

The banker class — including, perhaps focusing on, financial intermediaries on Wall Street — sure made out like the proverbial banditti, many of whom had their fortunes handed back to them after they lost billions and billions in 2008 and 2009.

Other programs bailed out Big Auto, to the advantage of stockholders and managers and union workers, but not to the discernible advantage of consumers or creditors or the bulk of non-​union workers.

And yet, consider the extent to which government intervention in the labor market — including tax breaks, mortgage re-​deals, and extended unemployment insurance — “helped” middle class and lower middle class workers and families. These programs had huge consequences, leading hordes to forego (hard-​to-​find) paid work for (comparatively easy-​to-​find) paid inactivity.

Americans are split on the lesson to be drawn from what they perceive as “scant signs of recovery” and government’s apparent lack of interest in “helping the poor”:

Although Americans were worried about the economic system, they remain starkly divided over federal regulations to control it. Nearly half thought that government regulation of markets did not go far enough, while almost as many said government regulation had already gone too far.

I’m in the latter camp. Government as Big Brother Bailout for businesses and families and individuals seems to just scuttle the necessary reshuffle our economy needs.

We don’t need more of the wrong response. We need less.

This is Common Sense. I’m Paul Jacob.

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national politics & policies too much government

Bakers’ Bailout

Bailouts aren’t just for big businesses any more.

Just a few years ago the “too big to fail” argument meant spending trillions on financial institutions and auto companies. Now it appears that rewarding failure — indeed, outright perverse dealing — has a new and eager beneficiary: the federal loot goes directly to unions.

Well, a union, at least. The Bakery, Confectionery, Tobacco Workers & Grain Millers International, whose brinksmanship shut down Hostess, Inc., has former Twinkie techs pulling in money earmarked in a specific way:

This week, the Labor Department decided to shower Hostess workers with Trade Adjustment Assistance, a multibillion-​dollar pork barrel program that was beefed up as a bone to Democrats, who were blocking passage of three free-​trade treaties in Congress in 2012.

TAA is a lavish program doled out by the Labor Department for laid-​off workers who’ve lost their jobs due to “global trade.”

Of course, those 18,500 Hostess jobs were not lost to global trade. They were lost to union pig-​headedness. The AFL-​CIO-​affiliated union was warned that without some cuts, the company would go under. The Teamsters entreated the bakers’ union to play ball. But no deal happened. And Hostess went under.

If the union’s negotiation tactic appeared as risky as a banker’s credit default swap portfolio on mortgage-​backed securities, it’s now proved to be as un-risky as the same. The union may not be “too big to fail,” but it appears to be “too well-​connected to fail.” The Obama administration is intent on throwing money at the group’s outrageous folly.

And so we continue to reward idiocy, well into the 21st century.

This is Common Sense. I’m Paul Jacob.

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free trade & free markets ideological culture

Rescue Them

“Ideas are forces: the existence of one determines our reception of others.”

This is more than just a statement of associationist psychology.

Take the politics of “welfare.” The modern project has placed government at the heart of society, construing its basic mission as that of “rescuing” people who make mistakes or suffer ill fortune. Taking over where self-​help, mutual aid, and charity left off — and at the risk of squelching self-​help, mutual aid, and charity — government steps in and provides assistance. Often permanent assistance, and within the context of vast bureaucracies and inescapable institutions.

The socialists who most insist on this messianic government seem to be mostly driven by a concern for the poor … and a hatred for the rich. (Sometimes both, sometimes just one or the other.) But the Progressives and New Dealers who actually established the institutions of “welfare” didn’t stop with just the poor. Once the Rescue Mission mentality stuck, there was no class that “shouldn’t” receive benefits.

The result? We watch anti-​corporate leftists squirm as they defend corporate bailouts.

But not all left-​leaning folks buy the whole package. In America and Europe high-​level panic led to vast fortunes squandered to bail out banks, etc. But in Iceland, the people let the creditors take their lumps and the banks fail while drastically cutting back on government deficits (though not targeting assistance for the poor).

That is, they behaved more like laissez faire economists than messianic technocrats.

And Iceland’s thriving, bounced back.

Of course, true believers in the awesome powers of government will resist any notion that bailouts aren’t necessary … ideas being forces and all.

This is Common Sense. I’m Paul Jacob.

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national politics & policies responsibility

A Loan of Common Sense

If you give something that belongs to you, without expecting to get it back, that’s giving. You just hand over a gift and forget about it. Perhaps you would appreciate a “thank you.”

If you lend to someone, you expect to be repaid. Those who don’t repay are called deadbeats.

If you mug somebody on the street and grab his wallet, you are stealing. You are then a thief, a robber.

That’s all straightforward enough. This is not: Say that you steal from the productive citizens of one country or countries (Country or Countries A) and give the dough to the fiscally irresponsible government of another country (Country B), and you call it a loan. But when Country B can’t pay the installments, it is provided another loan originating in the wallets of the very same Country A citizens from whom was extracted the original loan.

What is this? You are not only stealing, you are shuffling IOUs instead of getting repaid. You are also misrepresenting the nature of the transactions, for it is clearly a gift of stolen money and not anything voluntary, like a loan.

Bill Wilson, President of Americans for Limited Government, goes into a bit more of the nitty and gritty of Greece’s tricky tranche of “repayment” on its “loan” from the European Union, and relates it to the similar finagling here in the United States … which all rests on credit expansion by the Federal Reserve. “The eggheads in Washington, D.C.,” he says, offer only one solution: “just keep digging.”

But how deep? At some point it gets too hot down there.

This is Common Sense. I’m Paul Jacob.

Categories
folly free trade & free markets insider corruption national politics & policies

A $13 Billion Reward

The Federal Reserve, our central bank, hit the news big last week.

Beginning in August 2007 and continuing for the next two and a half years, the Fed lent the world’s biggest banks something like $7.77 trillion dollars at the barely perceptible interest rate of 0.01 percent. With that money, the banks bought Treasury bonds (federal debt) and made $13 billion in profit.

I reported on this multi-​trillion-​dollar loan figure in December 2008, a few weeks after the biggest day ever of Fed bailout fever. For some reason this information didn’t become widespread or understood until this December, when Judge Andrew Napolitano and Jon Stewart made a big deal of it on their respective TV shows, after Bloomberg reported the profits banks made off all that bailout money.

What does this figure represent? To me, it represents the outrageous amount of magic money a sick and corrupt fiat-​dollar/​bailout-​based system of moral hazard requires when it implodes.

I think we can all justifiably roll our eyes, now, when some rah-​rah boy for big government tells us how absolutely necessary it is to have a central bank. The old gold standard never fell apart this badly. The gold requirement itself placed a huge check on out-​of-​control banking.

But a $13 billion reward for the biggest financial mess in world history? That’s the very opposite of a check or balance on risk-​taking, greed, or downright stupidity.

This is Common Sense. I’m Paul Jacob.

Categories
free trade & free markets too much government

Saab Stories

Saab Automobile appears to be going down. The Swedish automaker was abandoned by its beleaguered parent company, General Motors, prompting the Swedish managers to petition the Swedish government for a bailout. In 2009, the Scandinavian government said “No.” GM then sold Saab to a Dutch manufacturer, which hit a cash crunch in this year’s first quarter. 

Lots of people with fond memories of the pre-​GM Saab thought that the Dutch outfit had a great idea: Revive Saab by reintroducing a 1940s look, the famous Saab 92.

But the financing fell through, sending Saab begging, again, to the Swedish government, with promises of radical restructuring.

A western Swedish district court again ruled, “No.”

This is not good for the people of Trollhattan, where Saab’s main plants reside. They will be hard hit, as in any disaster.

What is interesting is that, though many folks of Trollhattan have repeated the old social democrat line about how they are “people” who somehow deserve their incomes and such, the government refused to go along with the old bailout model.

One could argue that the oft-​idolized Swedish nationalization/​capitalization/​marketing solution was the model for America’s 2008 and 2009 bailouts. The method looks less popular, these days, in its home country.

We’re living in tough times, getting tougher. Still, at some point we’ve got to bite the bullet and resist trying to “fix” failed businesses by government. 

Governments fail often enough, themselves, without moonlighting this extra job.

This is Common Sense. I’m Paul Jacob.