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Montana Viewpoint
CAPITALISM WITHOUT RISK
September 17, 2007

I ran across an article in the newspaper the other day about the home mortgage crisis that raised my eyebrows. The article was written by a fellow named James Grant, who is the editor of “Grant’s Interest Rate Observer” and a columnist for Forbes online magazine. One sentence stuck out like the proverbial sore thumb: “Capitalism without financial failure is not capitalism at all but some kind of socialism for the rich.”

Well, that’s an interesting thought. What Grant is talking about is government coming to the aid of failed businesses, in this case the home mortgage industry, which is in big trouble.  It’s in big trouble for a lot of reasons, one of which is that the industry has made some big time bad financial decisions.

I’ve made bad financial decisions, too, but I’m the guy who has to accept the consequences. When a major industry starts to go belly up, I’m still the guy who has to accept the consequences, and so are we all.

When the United States government rides up on its white horse to save the day by infusing money into a failing industry, it’s our money. I understand that major business failures will have a negative effect on the economy, and that some, maybe many, of us will suffer financial consequences like lost jobs or inflation. But is the only alternative to have us pay taxes to bail out the industry?

Remember the bumper sticker that said, “Don’t panic, there’s always Welfare”? That was aimed at those supposedly shiftless folk who would sooner take a government handout than personal responsibility. So what’s the difference if industrial financial failure is rewarded with a government bailout?

The “subprime crisis” is just history with a different cast of characters. The Savings and Loan Crisis of the 1980s cost the American taxpayer $153 billion to bail out the failed Savings and Loan companies, and the causes were similar; relaxed government standards (deregulation), relaxed government oversight, relaxed corporate decision making, and out and out corruption.

Rescuing the Savings and Loans helped the individuals with money in those institutions, no doubt about it, but more to the point, it got the institutions off the hook. Deposits in Savings and Loans were insured by an industry financed insurance fund regulated by the federal government (Federal Savings and Loan Insurance Corporation), but that insurance was woefully inadequate to cover the actual losses of depositors, and so, the bailout.

A recent article in the Financial Times by David Lachman of the Libertarian leaning American Enterprise Institute sums the subprime mortgage causes nicely. “…the unfortunate interaction of financial innovation gone awry, inept market regulation and a failure of the rating agencies to exercise their fiduciary responsibility to protect the average investor.”

Risk is the great regulator of financial decisions; the lower the risk, the higher the certainty of modest reward; with greater the risk there is the possibility of grand rewards, but tempered by a high risk of failure. When risks are covered by a third party, whether it’s a government safety net or parents coming to the rescue, the door is opened wide to unwarranted risky decisions.

And when risky decisions are made by industry there is, as Grant writes, “[T]he notion that while the risks inherent in the business of lending and borrowing should be finally borne by the public, the profits…should mainly accrue to the lenders and borrowers.”

Lachman concludes his article by saying, “[I]t is important that the financial institutions, which stood the most to gain from that lending, rather than the taxpayer, foot the bill.”

Well, that won’t happen, and we, as taxpayers, will be paying off their debts. But at least we will all pay our unfair share. There are those who are nowhere near as fortunate as to having that cold comfort; they are the ones who have gone through foreclosure because of bad advice from mortgage lenders. They get to lose their homes and savings, and they get to foot the bill with the rest of us, too.

 

Jim Elliott
Phone: 406-444-1556
Mail: State Senate Helena, MT 59620

jim@jimelliott.org