October 15, 2011

Anything But Arm's Length Bailouts

A new banking crisis, with epicenter in Europe, is widely being speculated. It will be good to learn from the last experience on Bailouts and not do them all over again. There are Other Options abound, than maintaining the undeserved opulence of Wall Street on public money while cutting social programs for children and the elderly.

Let's face it. The first line of focus that Companies maintain is to shore up their bottomlines and stock prices, followed by maintaining Top Executive compensation.
When a company screws up on its finances and business model, throwing a lifeline at it with additional tax breaks or Government purchases, most of all Bailout dollars, does not imply the company will add employment. It adds employees when there is additional money that its target customers have that it can win by selling more of its products and services. Getting a money shower from above makes it unnecessary for the company to fight more in the market with more employment. So, artificial Corporate or Wall Street resurrections are a hopeless social policy. Besides, these weaken the merit and diligence values inherent in TRUE Capitalism.

Sometimes arresting the fall of a whole sector might become necessary in the interest of averting a cardiac arrest, and death, of an economy as a whole. After all, hitting one's face to spite one's hand isn't such a great idea. In such a scenario, following a process of temporary Nationalization, rightsizing and rightcomping, then reprivatization, needs to be followed. It was very well executed in keeping the American Auto sector from collapsing lock stock and barrel. The same could not be applied on the Banking-Financial system in 2009 because the Tea Party was riding high then with the Independents, on the suspicion that Socialism - Government running Businesses even more than it already has been - was round the corner. The Auto Sector restructuring has now played out its full course, and no incremental socialism occurred as a result. And the process did not enable public money to be cornered by bailoutee Executivedom for their own welfare that they had proven unworthy of. Yet the arm's length bailouts that Wall Street received, and continuous Top-Down policy support with QEs and abeyence of Mark2Market, have resulted in exactly that. The Tea Party murmurs not against it, advocating all deficit reduction with merely cuts in social programs, opposing even plugging the holes in the tax code that are making it regressive! No wonder, TP has lost the imagination of the Independent people. The result: #OccupyWallStreet.

Nationalization isn't the only option. Dodd-Frank in now in place to do an FDIC style resolution in cases of Financial Firms that are not within the scope of the traditional FDIC. Of course, the BEST option, when possible, is to simply let the mangled firm fail in the market without any Executive or agency intervention.

Arm's length bailouts, and other Top-Down Corporate-Wall Street welfarism, are Both a social waste and weaken the spirit and vibrancy of genuine Capitalism.
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1 comment:

  1. "Getting a money shower from above makes it unnecessary for the company to fight more in the market with more employment."

    Well said.