Government Subsidized Failures, Interest-free

If government lacks the responsibility to prevent economic loss, is it even prudent for government to act? From the outset, a taxpayer-subsidized bailout would do two negative things.

First, it would set a precedent that government will act as a corporate parachute if lobbied hard enough. This encourages irresponsibility in business decision-making. One only needs to look as far as Fannie Mae and Freddie Mac to see how government involvement in private organizations changes the dynamics of wise risk/profit analysis. While being privately run, they were government owned and thus felt secure to dabble in the risky subprime market knowing that the government would not allow them to fold. Commenting on the Fannie and Freddie situation, Senator Kay Bailey Hutchison of Texas stated that, “The expectation of a bailout is an incentive for other private financial institutions to ignore risk in the future.” The Economist equated the situation to “a hard-living student who relies on his parent to cover his debts.” George Gilder in Wealth and Poverty wrote:

Government can displace risk—by insuring against its effects on some citizens—but cannot finally escape it. If the insurer state attempts to absorb all risks of individuals and businesses—of unemployment, inflation, foreign competition, waning demand, accident, and disability—it will find itself overloaded with larger perils and responsibilities than it can well manage.

A government bailout would displace the risk of not addressing serious inefficiencies and bad business practices, the biggest being its unwillingness to reign in the United Auto Workers (UAW) union. Currently the UAW demands exorbitant worker compensation far beyond what the industry can profitably sustain, yet the Big Three continue to avoid standing up to the union. Therefore, intervention of this type only seems to result in government subsidized failures, interest-free.

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