Saturday, September 20, 2008

Business and Bailouts

In my last post, a statement was made that I feel is too important to leave in the comments:
I've heard these arguments [that price gouging for gasoline is actually good] so many times, and I'm always struck by the idea that if they're all true, then there is actually no such thing as corporate greed. Which keeps me skeptical.

Another thing that keeps me skeptical is the incredibly large amount of smart people who are blaming deregulation for our current financial crisis ( It seems very likely that not all regulation is bad.
To my understanding, these statements are half truths. AIG failed because they jumped into a new and very profitable insurance market that they did not fully understand. This could be for one or of two reasons: 1) they mistakenly took a risk and lost, which is the nature and success of capitalism or 2) they knew the government thought they were "too big to fail" so they correctly took the risk knowing the taxpayers would pay for the loss. The second is an instance where I believe corporate greed is not only existent but harmful. But don't misunderstand what I'm saying. If the second is reality, it is not AIG I blame. It is the government financiers who allowed them into the public purse.

The second statement is equally half true. Yes, I believe deregulation is at least partially to blame for Freddie and Fannie's failures, but again the blame falls on government not business. I blame the public officials of the 1970's and since who felt it was their duty to "work with mortgage lenders to help people get lower housing costs and better access to home financing." Freddie and Fannie are GSE's, Government Sponsored Entities. You cannot be perceived to be backed by the federal government and not be regulated. The profits went to the firm, but when the risks were bore by the taxpayers. The problem is not with greedy Fannie and Freddie, but instead with the government putting its gun where it doesn't belong in order to gain political support.

The importance of this bailout is not so much a worry in the short run. The problem is instead one of moral hazard. When you insulate people from risk they act more risky. When you force people to wear seat belts, they drive more dangerously. When you bail out lenders and borrowers for bad loans, you only increase the likelihood of loans like that being made in the future.

I don't see businesses as greedy or moral. I see them as organizations that seek to allocate resources to their highest valued use. Instead of conniving snakes, they are instead much more robotic. Simply responding to increases and decreases in prices. Price goes up, there is more money to be made, so they produce more, which pushes prices back down to marginal cost. Prices go down, there is less money to be made, businesses leave the market or produce less, and the price moves back up to marginal cost. This is not only a theoretical model, but is how markets look.

However (and this is a big however), the government regularly steps in to "protect" the people through regulation. People shouldn't spend $5 a gallon for gas, so let's punish businesses for increasing prices when supply is limited. People shouldn't pay $1000 a month for rent in NYC. So let's cap the price and let prejudice landlords divvy up apartments based on their own preferences. People should all have the oppurtunity to own their own homes. So let's help these sub prime borrowers get some debt they probably can't pay off. And here's the best part. Let's convince the American people it's good for them too.


  1. Wow. Called out on the intraweb. A copy-paste of epic proportions. Ice cold, Brookie. Ice cold.

    Sorry, but I think I'm gonna peace out on this one. I'm outnumbered, outread, and now I have a whole post about comments of mine which were apparently half-truths. Time to get to work on my "libertarians are smelly" post. Or that "Friedman sux" bumper sticker...

  2. Ha ha I'm sorry man. This was never meant to be a Justin is a poop head post. I was just planning on doing something on the financial news anyways and your comments were the perfect starting point.

    I believe your opinions on the subject are commonly held, even by many academics, so let me state that this is an unbelievably complex issue with way to many factors to fully consider. I wasn't trying to prove you wrong, just maybe clear some of your skepticism.

    Also worth mentioning, this is not a place where I rule and everyone else is a commie. It's just me trying to make sense of my information overload life.

  3. Well, I believe your opinions on the subject are commonly held by YOUR MOM.

    I mean- peace out.


You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.