Bailouts…
March 18th, 2009 by Republican By DefaultFor capitalism to succeed, individual businesses must be allowed to fail. Just as in nature the weak must give way so that others may survive, a failing business that is consuming resources must cease to exist as a body so that others may be fed by it’s remains and by the resources it would have consumed. Sound brutal? It’s life, and it’s capitalism. And socialism is no alternative.
As I listen to the supposed outrage at bonuses paid to AIG executives, I wonder about the whole story. The fact is AIG as we know it should have failed and died out or been replaced with a new business model. Had that happened there would have been no bonuses. There would have been other problems as well, but would those problems be worse than what we and the next generation will have to deal with?
There was a local financial failure last September that resulted in the weak being devoured by the strong. JP Morgan (Chase) purchased assets and some liabilities from WaMu when it was in receivership. That move was capitalism at it’s finest. Chase grew and their stock went up. WaMu’s depositors kept their money and many (not all) of their employees kept their jobs. And that was before the $700B (i.e. $380B) Wall Street bailout.
“We’re in favour of what the government is doing, but we’re not relying on what the government is doing. We would’ve done it anyway,” said Jamie Dimon, JPMorgan’s chief executive.
Under socialism it’s the chosen that survive. Some may be weak but under socialism they are protected or made stronger by a powerful government which no one can argue against. So like the genetically flawed animal that is allowed to propagate in captivity when it would have died out in the wild, weak business models in weak markets are propped up and propagated in the economic captivity of socialism. But who’s paying for the zoo? The taxpayer, of course.
Had AIG failed, there would have been a few other companies on Wall street and in other countries that would have lost some money, but would probably have recovered in time or been bought out by stronger companies. The taxpayers would not be on the hook for $170+ Billion (in borrowed money) that was given to AIG (and forwarded on to pay debts to banks, some of which are foreign), which amounts to about $1,224 per taxpayer. You know, I can think of better ways that I could have spent my share of that. I’m sure you could can, too.
And there’s another piece of background information that doesn’t seem to get much attention. Tim Geittner, Barry’s pick to head the US Treasury, was one of the people who brokered the deal to save AIG in the first place. With so many people claiming that he (and Barry) inherited this problem, it’s interesting to know that Barry picked one of the guys who started this mess to oversee the whole thing, bonuses and all. And by the way, legislators (and Barry) have known about the bonuses since before the bailout.
I’m guessing that killing the bonuses was considered as a cost-cutting measure as they were discussing the bailout. But since the company didn’t go into bankruptcy or receivership, no one, not even the government, could prevent the bonuses from being paid. They were contractual obligations that AIG entered into just like the loans and other instruments that AIG paid back (again, some to foreign banks) with the bailout money.
Actions have consequences. Barry and his shock troops have no right to complain about something that they not only knew was coming, that they basically enabled, and that they prevented the only viable alternative to paying those bonuses by bailing them out. Instead of outrage, we should be hearing “mea culpa, tua culpa.” I won’t be holding my breath waiting for that to happen.
One of the best summaries of this problem that I’ve seen is from former Speaker of the House Newt Gingrich. Here’s an excerpt that he sent to subscribers of his newsletter (which I am one):
A company that needs a $170 billion taxpayer bailout is a failed company. The executives that led that company are failed executives. But instead of having to face the consequences of their failure responsibly through bankruptcy or receivership, AIG and its Wall Street “counterparties” are being rewarded for their recklessness — with our money.
Thanks to the Bush-Obama-Geithner policy of bailing out failing companies, we now have the worst of all possible scenarios: A taxpayer subsidized, government supervised private company; an unsustainable public/private hybrid that is too public to make its own decisions and too private to be responsible to the taxpayers that are keeping it alive.
Outrages like the fat cat bonuses currently dominating the headlines will only continue as long as the rule of politicians supplants the rule of law on Wall Street.
Congress should rethink this entire process. The dangers of a domino-like financial meltdown are real. But so, too, is the danger that the outrage of the American people will reach the point that we no longer trust the dire warnings — or the righteous indignation — coming from Washington.
One last point that should not be left out is that AIG is a large company with several divisions. Not every division was an abysmal failure. Some of the bonuses that they are paying were earned by people who did their job well, but were overshadowed by others in the company who failed.
Had there not been some successful executives within AIG, who have earned their bonuses by keeping their division profitable, the failure of the company would have been much worse. In a sense, they began the bailout by earning money for the company which covered some of the losses of the failing division. My point is that this is a very complicated issue that can’t be summed up in one soundbite.
No animals were harmed in the writing of this post.