Belaboring the bailout

Because I love nothing more than to belabor, I bring you this MeFi thread, in which there are two excellent This American Life episodes discussing the financial crisis. One of the salient points made by Adam Davidson:

“One option is I come and I give you a thousand bucks, and I take all the crap out of your basement, and you get to keep the thousand bucks – that’s the Paulson plan. The other option is I come and I give you a thousand bucks, and I get to move into your house, I become a co-owner of the house, I might get to kick you out of the house and take all of your stuff.”

The latter option he describes is a stock injection plan, a plan that would have a far more beneficial effect on the economy, if only for its punitive value. For the banks (and their influential lobbyists), it’s pretty simple: a stock injection plan was never an option. However, apparently a clause was eventually included in the bill that was passed that allows a stock injection option at the Treasury Secretary’s discretion. This is excellent news, considering that our government’s money is actually our money, and I’d like for it not to evaporate.

If you’d like a really accessible summary of the situation, see The Financial Crisis, As Explained to My Fourteen-Year-Old Sister (also found via MeFi).

Chomsky on economics

I’m going to unwisely quote Chomsky out of context here, in the hopes that it will whet your appetite for the whole article:

The designers of the international economy sternly demand that the poor accept market discipline, but they ensure that they themselves are protected from its ravages, a useful arrangement that goes back to the origins of modern industrial capitalism, and played a large role in dividing the world into rich and poor societies, the first and third worlds.

This wonderful anti-market system designed by self-proclaimed market enthusiasts is now being implemented in the United States, to deal with the very ominous crisis of financial markets. In general, markets have well-known inefficiencies. One is that transactions do not take into account the effect on others who are not party to the transaction. These so-called “externalities” can be huge. That is particularly so in the case of financial institutions. Their task is to take risks, and if well-managed, to ensure that potential losses to themselves will be covered. To themselves. Under capitalist rules, it is not their business to consider the cost to others if their practices lead to financial crisis, as they regularly do. In economists’ terms, risk is underpriced, because systemic risk is not priced into decisions. That leads to repeated crisis, naturally. At that point, we turn to the IMF solution. The costs are transferred to the public, which had nothing to do with the risky choices but is now compelled to pay the costs – in the US, perhaps mounting to about $1 trillion right now.   And of course the public has no voice in determining these outcomes, any more than poor peasants have a voice in being subjected to cruel structural adjustment programs.

A basic principle of modern state capitalism is that cost and risk are socialized, while profit is privatized. That principle extends far beyond financial institutions. Much the same is true for the entire advanced economy, which relies extensively on the dynamic state sector for innovation, for basic research and development, for procurement when purchasers are unavailable, for direct bail-outs, and in numerous other ways. These mechanisms are the domestic counterpart of imperial and neocolonial hegemony, formalized in World Trade Organization rules and the misleadingly named “free trade agreements.”

(Emphasis mine.) Think about that highlighted phrase: essentially our system of credit burdens all of us with the risk, and bestows upon us none of the reward. And as for companies being too big to fail, I think Senator Sanders is right when he says, “If a company is too big to fail, it is too big to exist.”

The Chomsky article as a whole is actually much more broad in its scope than the financial crisis and bail-out; but then, Wall Street’s relationship to government is much broader in scope than just money. It’s very thought-provoking stuff, especially if like me, you rarely take South America’s role into account. History is being written on this mess right now, and it’s bigger than just bad debt causing companies to fold. We need a major philosophical paradigm shift in the corporate financial model if we want something that is sustainable and shields the average person from harm.