I see it as a re-wording of a specific complaint, which I’ve also heard some people make. The basic complaint is that the heads of these companies (that are now going belly-up or being bought out) made irresponsible decisions and that the government is now bailing them out.

From some of what I’ve read, there was a total culture of irresponsibility in regards to granting loans and home mortgages.

I can’t really disagree with the government rescuing the entire system when it is at risk of total collapse.

I wonder though, what the ramifications are of the government getting into the insurance business (AIG).

Mark Cuban’s assessment and solution:

Link here.

Cuban is right about the dangers of “F U money”. Once you have that kind of money, you are likely to say “F U” if money was your motivator.

note that Carly Fiorina of HP fame said yesterday that neither McCain nor Palin could run a large company. This while in the role of a McCain surrogate. The campaign has asked her to please shut up.

note that Carly Fiorina of HP fame said yesterday that neither McCain nor Palin could run a large company. This while in the role of a McCain surrogate. The campaign has asked her to please shut up.

She said the same about Biden and Obama too. (Which didn’t get quoted) Her point was that being President wasn’t like being a CEO. I don’t think I agree. While the skills don’t exactly correspond I actually think that being a successful CEO would be valuable as President.

But in the current environment where everyone is quoting everyone else out of context folks should be really careful what they say.

ARJ, at least try and be fair. She said no one on a major party ticket could.

One political science professor who said, “The American economy has now demonstrated that it privatizes profit and socializes loss” was George Will, who said it in the green room video segment of This Week available online.

George Will also pointed out that Greenspan’s statement to the effect that this is a once-a-century banking meltdown emphasized that this sort of thing can only happen in a healthy economy.

On a side note: When liberals try to poke fun at conservative, pro-market by talking about the obvious need for government intervention, they’re demonstrating how little they know about conservatism. They might as well poke fun at conservatives using The Jungle. The only question is how much intervention, and whether one errs on the side of less tolerance for instability or on the side of less tolerance for interference.

Tim, he has been. I don’t think McCain is particularly good on economics. But with this week’s events Obama looks bad and McCain quite good.

KyleM,

Ok, let’s be really fair. When asked about Palin she responded specifically that Palin could not run a company such as HP. Later in the day she was asked about that comment, repeated her comment about Palin, and then without being prompted added what she thought about McCain and then threw in that Obama and Biden couldn’t do it either. What is spectacular here is that she’s been the number one McCain surrogate for several weeks (if not months) now.

Given what she did to HP and Lucent it is surprising that the campaign would want her as a surrogate. I’m guessing she won’t play nearly as much of a role going forward.

DKL,

Several people have been saying that we’re privatizing profit and socializing loss and variants of it for weeks now. There was an issue of Newsweek that came out around the end of July in which several economists said that over and over. It is catchy because it is simple and encapsulates what angers people over this situation.

Ah, I’ve found it. Some examples:

Robert Reich:
We’ve created the worst form of socialized capitalism—private gains combined with public losses.

Larry Lindsey:
This leads to both the privatization of profits with the socialization of losses and political interference in the processes of profit making and loss mitigation.

Jeremy J. Siegel:
There is no reason that this deal should only become a “heads, the stockholders win” and “tails, the taxpayers lose” proposition.
…
Government bailouts are not without their downside. Promises of bailouts may encourage firms to take excessive risks (what economists call “moral hazard”) if they know the government will come to the rescue.

Peter Wallison:
…government backing for a private, shareholder-owned company will inevitably come to a bad end. Government backing creates moral hazard, inducing lenders to shed the wariness they usually display in lending to an ordinary company; the easier money thus obtained, and the lack of market discipline, permits managements to take extraordinary risks in pursuit of extraordinary profits. As with Fannie and Freddie and the S&Ls before them, these risks turn into losses that the taxpayers must absorb.

Notably two of the economists, John Snow and Robert Rubin, didn’t seem to bring up moral hazard as an issue. But 4 out of 6 ain’t bad.

While it’s a catchy phrase and has some truth it seems hard to argue that even the rich haven’t lost a ton. They are the ones making most of these investments and seeing their stocks fall. Even companies that have been saved are hardly in as good a position as they were two years ago.

arj: Several people have been saying that we’re privatizing profit and socializing loss and variants of it for weeks now. There was an issue of Newsweek that came out around the end of July in which several economists said that over and over. It is catchy because it is simple and encapsulates what angers people over this situation.

Yes, I’ve heard it before. That’s why I stated that Will was “one of them.”

But let’s be perfectly clear about what failure we’re socializing when we bailout these companies. The “bad paper” that the banks are holding are mortgages to poor minorities so that they could not afford to buy houses. Shows what happens when you eliminate “red lining.”

The Democrats should be shouting from the rooftops about how this helps the lower classes by making sure that a much higher percentage of them get loans (after all, only a small percentage of the high-risk mortgages have failed — enough to hurt the banks to be sure, but also enough to say that if all it took was a few hundred billion dollars from the US government, than this was a fairly successful program in increasing home ownership among the disadvantaged.

This kind of misses the point. What we are seeing with the bailouts now is just government trying to pick up the pieces of a system that went horribly wrong for other reasons. At a certain point, a company is simply “too big to fail.” You can’t let them go under because it would cause too much damage. But we didn’t get to this point primarily because of government bailouts.

The housing bubble was a major reason for the risk-taking behavior. But another big reason was the PRIVATIZING of loss (contrary to the quote in the original post).

This is how the credit industry works. All lending portfolios are insured and the insurance plans are traded on the stock market. So if you stopped paying on your VISA bill today and VISA either wrote the debt off as a loss, or if you discharged it in bankruptcy, VISA would not lose a dime. The debt is insured, and VISA would get the entire amount paid off, regardless of debtor behavior.

This is just an example of consumer lending, but you can find similar incentives and behavior throughout the lending industry. There is no incentive for loss mitigation, so lenders aren’t quite so shy about taking on bad credit risks (ever see the Mastercard kiosk handing out free cell phones at Freshman Orientation?).

This is an example of where the free market fails. The insurance scheme makes a lot of sense to the lender. But the scheme itself institutionalizes and encourages the kind of behavior that ultimately leads to market collapse.

The appropriate response would be a reverse of the deregulation trend we are currently in. If the free market will not produce adequate safeguards, lenders must be forced by government oversight to do so. I can’t speak for other lending, but with consumer lending at least, I’d have a few suggestions. Caps on possibly interest rates, and definitely caps on fees and charges. Restrictions on who can be issued credit. Basically, if the lenders cannot be incentivized to act responsibly by the free market, government needs to step in and fill that role.

The economic reason for government’s existence is to counter-act market failures.

Well, the market just failed, I’d say.

DKL,

You and I both know that “world’s top PC maker” is a dubious distinction. There’s a reason that IBM got out of that game.

come on, arj. I picked the part that was the paragraph that was totally un-political, because I thought her point has the potential to be interesting, and if it’s going to be discussed, it shouldn’t be considered pro/anti-Obama or pro/anti-McCain. (The Enron regulations were bi-partisan.)

It’s no secret that conservatives are unhappy with McCain’s Wall Street bashing.

Mercy cannot rob justice, eh John?

Wow. I guess I hit a nerve.

John, if you had invested in oil, silver or gold you’d be doing quite well.

John Mansfield,

I’m doing well. We’re finishing our basement. It made more sense to do it with cash as refinancing wouldn’t have worked. If we had plowed all our cash into our mortgage it would have been a mess. We’ve continued to dollar cost average into the market and are doing fine. Things have gone down but not as much as the market as a whole. Thanks for asking!

btw, you do know that I was talking about long term, right? Because your question implies otherwise.

There are quite a few. Investing into funds that supply payday loans is still pretty solid and still gets you a return. My point was less about gold than just the fact that there are always investments you can do. Even in the stock market there’s companies that are up. Some companies, like Apple, are way down below worth and can almost certainly be counted on to return. Had I money I’d be investing it like mad in the stock market right now. Heck, I’d be investing in real estate like crazy. Amazingly low interest rates and no trouble getting a loan if you have good credit and houses are underpriced. Start looking around for some repoed homes that you can flip in two years (maybe renting out in the meantime) and you’d make a killing.

Unfortunately all my money is invested in my business right now so I can’t do that.

“Investing into funds that supply payday loans is still pretty solid and still gets you a return.”

If you don’t mind selling your portfolio to Satan.

DKL #24 wrote: “The “bad paper” that the banks are holding are mortgages to poor minorities so that they could not afford to buy houses.”

Ha? ‘That not make sense’ Doh! Or is it just redneck speak?

Anyway, I honestly doubt that the republican establishment led by Bush and his cronies would change their ideology all of a sudden and socialize something -especially for minorities. Maybe we should look at this the other way by noting that they have stepped in only when the crisis became overwhelming and there is no other option here.

Maybe people should be asking just how massive is this financial meltdown now that even the Republicans are willing to step in. And what’s around the corner now that the Republicans have added more zero’s to that massive fiscal deficit?

And I think you over reacted, so I suppose that we’re even. BTW, DKL made himself the gander.

To add, the reason I think things is different with the banks is that they were following a methodology (wrapping loans together) that made consumers (other banks and investors) unable to know what was in the loans. Then some investors (stupidly) pressured banks for more of those which led to pressures on the people giving loans to regular buyers and led to even stupider loans. However the main problem was a lack of transparency.

But if the government is going to be paying for these mistakes then the government ought be able to put in restrictions on it all (i.e. regulation). To me that’s acceptable just as it’s acceptable in any contractual negotiation. Say if you want insurance you have to abide by the terms of the insurance.

It seems to me that the issue fundamentally that what is being done now isn’t being done by the government. This is Pelosi’s and Reid’s fundamental complaint and appears shared by most Democrats and a surprising number of Republicans. But I thought the whole point was that these organizations weren’t supposed to be the government so as to keep it from the whims of populist (and frankly largely ignorant) forces. Yes the central bank and associated organizations are quasi-governmental. But I think it’s quite good they are independent.

Where conservatives are getting upset is over whether they exceeded the limits of their power. i.e. their fundamental complaint is a rule of law issue. I’m neither a lawyer nor an economist. But a common view in America is it’s easier to repent than ask permission – especially in times when time is of the essence. And while I find that mindset disturbing in this case I think it’s appropriate. (It also isn’t clear that they have exceeded the powers granted them by Congress despite the uproar among the more libertarian and statist chattering classes)

The market’s assessment of Fiorina’s performance as CEO was decidedly negative. Not only did the stock lose half its value during her tenure, but it jumped 7% the day she was ousted. You can argue she was a great CEO or she was a terrible CEO, but the people who had money on the line collectively said her absence made the company 7% more valuable.

Mathew: the people who had money on the line collectively said her absence made the company 7% more valuable.

One can’t reason from the fact that people took independent actions buying or selling a stock that they collectively “said” anything. It’s a bit mind-boggling to do so (literally), because it commits both the fallacy of composition and the fallacy of division at the same time.

The fallacy of division by assuming that the collective effect of the actions is some gauge for the intentions or motivations of the people making them.

The fallacy of composition by assuming that the individual decision to sell the stock “said” something collectively, rather than simply having a collective mathematical impact.

Looks like the GOP is still doing everything it can to protect the richest Americans. The Democrats are angling to reduce the pay to executives of companies the government bails out but the White House is fighting hard against that part. WTF?? Here’s a quote:

administration officials agreed Monday to include mortgage help for beleaguered homeowners but wrangled over other issues including “golden parachutes” for executives who benefit from the unprecedented rescue.

Democrats demanded that the measure limit pay packages for executives of companies helped by the biggest financial rescue since the Great Depression. The administration was balking at that

It is starting to look like the Republican leadership knows where its bread is buttered and they are willing to ask any sacrifices of the richest Americans. (But the other 98% of us can sacrifice to support the rich of course.) I heard Donald Trump endorse McCain heartily on Larry King the other night. Is it any wonder? Obama want to cut taxes for 95% of us but raise taxes for the top 5%. Of course rich and powerful folks like Trump would be against that sort of populist economic policy. It was funny to even see Ben Stein disgusted with the GOP over this deregulation mess though.

I am feeling pretty sheepish about voting Republican all these years. Their “protect the rich at the expense of the poor” policies seem to be directly contrary to my Mormonism. I have no idea why so many Mormons think the GOP is practically the other prophet. I suppose that promises of ending abortions and gay marriage are enough for Mormons to turn a blind eye to the reprehensible economic policies the GOP pushes (as the richest of the rich pull the policy strings behind the scenes).

Geoff J, that comment is downright silly. The problem is with mortgages. The president proposes that the Treasury Department absorb the mortgage problem. You may like or dislike the proposal, but the Democrats’ behavior cannot be justified. They’re gumming up the process of passing a bailout by trying to tack on all sorts of social policy.

If pay-caps for failed executives are such a grand idea, then why don’t the Democrats (who have the majority) do it themselves apart from the bailout?

The Republican Party is the party of the working man. That’s why it gets a much larger percentage of its money from $50 contributions and below. The Democrats are the ones who pander to celebrities.

The reason most Mormons think the GOP is the other prophet is because they’re smarter than you. (Just kidding. I thought that sounded like a funny thing to say.)

“At a certain point, a company is simply ‘too big to fail.’”

Maybe we should give some thought to preventing companies from growing to become a threat due to its size.

And maybe nations, too. I think we were on the right track back when we were the United States (plural) instead of The United States (singular).

nasamomdele,

It was an intentionally silly reply to Jeff Bennion’s silliness. I’m sorry that didn’t come through to you. However I will point out that I don’t want a slice of anyone’s pie. I’m doing just fine. I think it is Wall Street is looking for free pie at the moment. I’ll admit that this is odd to me given that the big 5 investment banks (now gone) gave out $36 billion in bonuses last year. I wonder what they’ve given out in bonuses over the last 5 years? Could they save themselves?