In the span of the last six months, bulge bracket investment banks have been disappearing. Bear Stearns collapsed in March; Lehman Brothers filed for bankruptcy last week. Merrill has made plans to be bought by Bank of America, while Morgan Stanley is supposedly in talks with Wachovia. Criticism has rebounded in the past week about the US government's push for socialism. Government should not interfere in the private sector. We can overlook certain policies that have been in effect for so long that the denouncement of said policies would incur the involuntary horror of citizens, for example minimum wage, much like Isaiah Berlin's opinion of impregnable, individual spheres of liberty. But the direct intervention by government into the public sphere - cash infusions for companies - is taking things too far. We should not create moral hazard, an atmosphere that seduces corporations into believing that taxpayers will always cover for them. But all right. If our ultimate end is to protect taxpayers from irresponsible corporations, then the best choice might not always be to let those corporations fail, if allowing their failure would cause even deeper damage to taxpayers. Given that these banks inter-invested and that pensions and IRAs held stock of these banks as well as stock of companies who in turn had invested in these banks, and given that the vast majority of Americans plan for retirement, then bailing out these banks was on some level justifiable. Potentially bailing out the Detroit automakers, however, is not. Americans would still have cars to buy even if GM, Chrysler, and Ford tanked. No reason exists for these three companies to get $25 billion in loan from the US government. They are not crucially intertwined in the financial word; they are not tied to most Americans. So why make most Americans support the burden of the potential layoffs of a few? The Big Three should bite their lips and learn from their more successful competitors instead of begging for an unfair boost.
Source: [http://www.washingtonpost.com/wp-dyn/content/article/2008/09/19/AR2008091903183.html?sub=AR]
Monday, September 22, 2008
Oh, Those Bailouts
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I am not quite clear on Castle’s argument; he/she first argues that one “should not create a moral hazard,” a blurring of the line, when it comes to government intervention in the financial sector. Yet the next sentence seems to condone recent bailouts of large financial firms. The final point reverts, and argues that for no reason should our government help the Big Three automakers out of their debt. (This last point I feel can be quickly qualified: the main stipulation on the House’s passing of the loan is that the money be exclusively put towards developing hybrid vehicles, and by extension help our economy move in a greener direction). More importantly, though, is going back to Castle’s first and strongest point, as to what is “right” and “wrong” in economics. Economics has no “moral hazard.” It has nothing to do with Berlin’s spheres of liberty (assuming that any government intervention is purely economical, and doesn’t somehow actually infringe on individual liberties, a pretty safe assumption). It is a logical decision on how to best help one’s economy, a decision unmuddled by philosophy. Normally, that is to leave it be; free markets perform better. But we have a long history of government intervention into our markets, and for good reason. Now is one such time when it is right. To let our nation’s financial sector collapse, without intervention, wouldn’t just hurt Wall Street, but affect every type of market in America and the world. Government buyout was necessary, and beneficial, to all of us. The precedent, and historical connection, is, obviously, the Great Depression, when our government did not initially interfere enough. Perhaps a better example, and to show that extenuating circumstances render a degree of centralized control necessary, was our countries airlines after 9/11. No one wanted to travel, and consequently airlines came close to bankruptcy. Had our government not helped these companies, we would have greatly a significant amount of air travel, which would have in turn hurt our economy more. It is unrealistic to make the statement that “Government should not interfere in the private sector.” There is a difference between great economic regulation and economic intervention in times of need.
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