Privatized profits, socialized losses

Is it the government's job to bail out financial institutions that enter into irresponsible business transactions? There is nothing wrong with allowing a business in the real world to experience the natural consequences of making a series of bad decisions, many economists argue. The market correction witnessed this week by the tumbling of Lehman Brothers and Merrill Lynch's $50 billion buyout by Bank of America will actually be good for the economy in the long-run.

Nouriel Roubini, chairman of RGE Monitor, describes America's current corporate welfare maze by noting what we have a system where "profits are privatized and losses are socialized." The news that the Fed is going to use taxpayer funds to offer a loan to AIG is no less than appalling. The Associated Press reports:

In the most far-reaching intervention into the private sector ever for the Federal Reserve, the government stepped in Tuesday to rescue American International Group Inc. with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9 percent stake in one of the world's largest insurers and the right to remove senior management. ...

The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

This will not be a popular position, but let AIG file for bankruptcy and open the company up to liquidation over time. Let the company fold. Roubini reminds us that the current crisis is not simply a result of the subprime market but the "subprime mortgages, near-prime mortgages, prime mortgages, credit cards, auto loans, student loans, commercial real estate, municipal bonds, leverage loans that finance deals that should have never occurred."

The key phrase in Roubini's comment is "should have never occurred." These financial institutions made silly mistakes, like giving mortgages to people with pathetic credit histories and offering ridiculous credit card limits to people who cannot afford them. Then the consequences are socialized to tax payers to foot the bill. Why are taxpayers held responsible for the irresponsibility of business leaders who leveraged debt with more debt?

The socialization of corporate losses does not create a climate of fiscal discipline desperately needed in global financial markets today. Additionally, why would a company like AIG want the federal government to have an 80 percent stake in its company? The government is ill-equipped to run itself, so why would one entrust billions of dollars of assets to the tentacles of government bureaucrats with a bridge loan?

No company lasts forever and it is not the government's job to interfere with natural processes, especially when we are in the throws of corporate irresponsibility among private parties. Of course, the worse part of this current crisis is that it will result in more regulation because Americans have been conditioned to look to government to clean up everyone's spilled milk.

The important question is why do we have a regulatory system that does not encourage more competition so that when massive companies like AIG fold, the results are not as potentially disruptive? We need more companies not less.