Last week, the US government took control over Freddie Mac and Fanny May, the financial gaints of the US martage industry (and the crisis). Now this puts the US government in control of nearly half of the $12tn mortgage debt in the US (The two companies have lent or underwritten about $5.3 trillion mortgage debt in the United States). There have been several justifications for why such a bail out was necessary, and how it will keep the US economy from collapse, blah, blah, blah…This is not what this post is about. This post is about personal and ideological consequences of this action.
Just to put things in perspective, the $5.3tn bailout has effectively doubled the US national debt over a weekend! Worse, the actual cost of the bailout is yet to be ascertained, simply because nobody knows how much of the $5.3tn debt will be defaulted and/or foreclosed, and not to mention that ensuing expense for when the companies dispose off the foreclosed property. If the actions of the Republican VP pick — Sarah Palin — with respect to selling off state property is any indication of government attitude towards it, then looks like the US government will be losing a lot of money in the near future.
Now the question is, where is all this money going to come from? Answer: the tax payers. So suddenly some third party’s unwise decision to give a sub-prime loan to thousands of unqualified individuals, a decision that I had no control over, is now going to cost ME money?!?! And again, I have no control over that decision! Am I the only one who thinks its a wee bit backwards?
Personal gripe aside, this decision does have other implications which may seem too ‘theoretical’, but should be of significant concern. The decision has implications on social and personal responsibility, ideological fidelity, and designed failure of free market economics.
- Social and personal responsibility:The bailout decision is essentially sending the following message: “If you screw up, no worries, we will try to fix it at no cost to you!”. So essentially we are divorcing people from the responsibility of their actions. The bigger the screw up, the better are chances of the the government fixing it for you. So if you are going to screw up, make sure your screw up big, really big. Once people start hurting from it, then you will be taken care of. In the end, there is nothing to dissuade you from doing it all over again. This is effectively rewarding bad behavior! And this will come back to bite you in the back eventually.
- Ideological Fidelity: The environment for such reckless lending as set up by the continual deregulation of the economy since the 1980s. Such deregulation was in the ‘spirit’ of capitalism and free market economics. If the over arching idea is that a free market will correct itself, then why is the government messing with it by bailing Freddie and Fanny out? If such an intervention is necessary, then what does that say of the capitalistic and/or free market ideology? So is free-market capitalism a flawed concept, which when allowed to run its course will only serve to destabilize the economy? If that’s the case, then would the US come out and say it? Of course not! Its the free market and the pursuit of the ‘American dream’ that makes US so special, so different, so un-Russian, so un-commie. Yet, when it comes down to it, this bailout is largest nationalization in the history of mankind! Now people want to have the cake and eat it too. They want a deregulated economy because free market is where progress is at, and every time it fails (which it inevitably does), either no one wants to suffer through the market’s natural correction process (which is painful at the least), or the system itself is too flawed to correct itself and hence requires an socialistic style intervention. Despite that its still free market. What kind of the ticking time bomb is this? Eventually, US’s debt with catch up with the economy, and then what? There wont be any more money for bailouts. So are we looking at a spectacular collapse in the future? Mostly because all the stake holders are opportunistic hypocritical prostitutes of their ideology?
- Failure of the free market: Is this bailout a slam-dunk argument against free market economy? That’s a tough question to answer. It is quite possible that a free-market system is sufficiently robust and self-stabilizing to a point where it can recover from any jolt it might receive. However, the stakeholders in the economy are not willing to labor through the painful transitional period when the economy is healing itself. In fact, such acute volatility may be a part of growth, maturation, and robustness of the economy (much like a human body learning from experience, diseases, and vaccinations). Such intervention, however, has effectively thwarted the healing that the economy must naturally go through in order to be more robust in the future. So effectively, this bailout is building a near-fatal design flaw into the free market operations to where such bailouts are going to be an infinitely often deal, or there will be more economic crashes and collapses to look forward to in the future.
So either way you look at it, the bailout is at best a short term relief which addresses the symptoms but exacerbates that root cause making the economy even more vulnerable that before to such volatility.
Image source: allposters.com