sophiaserpentia (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
sophiaserpentia) wrote2008-08-08 04:28 pm
sophiaserpentia) wrote2008-08-08 04:28 pm
Entry tags:
privatized profit, socialized debt
It shouldn't really be such a rare occurrence that my president says something i agree with, that it causes me to do a double-take and exclaim with surprise. But that's what happened a little while ago when i read Bush saying that the government should not bail out failed banks.
But, i should have known that with politicians of all stripes there's a vast difference between what they say and what they do, and lo and behold, the Federal government is going to bail out two of the biggest banks of all. This, after the Fed has alreadyprinted money indiscriminately extended a special line of bottomless credit to certain kinds of institutions.
But of course, these banks are "so big" "we can't afford for them to fail." The loss of capital, savings, and jobs would be too big a hit. And yeah, they're right; we can't afford to have major parts of the economy evaporate.
Here's the story so far. Millions of mortgages were given out to folks who, the old rules said, couldn't have gotten a loan, because their incomes are just not stable enough to handle it. The new rules said, go ahead and give them a loan, we've thought of a way to spread out the risk so that no one takes too bad a hit. We'll plan on having a certain number of losses and just take "loan debt" as one package deal.
The whole thing depends on there being many more good loans than bad, so that the losses are covered by the gains. Problem was, when too many of the subprime loans went into default, there was a cascading failure because the fractional reserve banking system relies on enough people paying their debts for lenders to remain solvent. Once the losses became big enough, there wasn't enough money on hand even to make prime loans happen.
As has happened before, the government is talking about - and will - come to the rescue of banks under the argument that it is more harmful in the long run to let them fail.
In the long long run, maybe it's more harmful to create a moral hazard that encourages capitalists to behave recklessly.
The fact that it's happening twice in the space of two decades will hopefully be enough for some Americans to form an understanding of what is really happening here. When i took macro-economics in college, we were told that the essential moral underpinning of capitalism is that entrepreneurs deserve to make a profit because they are taking risks. Many ventures fail, so under capitalism things can happen that might not otherwise.
What happens to that moral underpinning when it turns out that a big enough risk can be shrugged off onto taxpayers, while profit remains in private hands? If it happens with regularity, it starts to look less like a "natural business cycle" and more like a huge fucking swindle.
Who ends with the profits and the assets? Lenders. Who ends up with the debts, the broken lives, the drained-out savings accounts, and a sham of a government assistance program? The middle class. Who winds up paying the bills and sweeping up the mess? Taxpayers. Dare i point out the racial dimension of the crisis as well?
It's not the way capitalism is "supposed" to work. But it's probably the way it's designed to.
But, i should have known that with politicians of all stripes there's a vast difference between what they say and what they do, and lo and behold, the Federal government is going to bail out two of the biggest banks of all. This, after the Fed has already
But of course, these banks are "so big" "we can't afford for them to fail." The loss of capital, savings, and jobs would be too big a hit. And yeah, they're right; we can't afford to have major parts of the economy evaporate.
Here's the story so far. Millions of mortgages were given out to folks who, the old rules said, couldn't have gotten a loan, because their incomes are just not stable enough to handle it. The new rules said, go ahead and give them a loan, we've thought of a way to spread out the risk so that no one takes too bad a hit. We'll plan on having a certain number of losses and just take "loan debt" as one package deal.
The whole thing depends on there being many more good loans than bad, so that the losses are covered by the gains. Problem was, when too many of the subprime loans went into default, there was a cascading failure because the fractional reserve banking system relies on enough people paying their debts for lenders to remain solvent. Once the losses became big enough, there wasn't enough money on hand even to make prime loans happen.
As has happened before, the government is talking about - and will - come to the rescue of banks under the argument that it is more harmful in the long run to let them fail.
In the long long run, maybe it's more harmful to create a moral hazard that encourages capitalists to behave recklessly.
The fact that it's happening twice in the space of two decades will hopefully be enough for some Americans to form an understanding of what is really happening here. When i took macro-economics in college, we were told that the essential moral underpinning of capitalism is that entrepreneurs deserve to make a profit because they are taking risks. Many ventures fail, so under capitalism things can happen that might not otherwise.
What happens to that moral underpinning when it turns out that a big enough risk can be shrugged off onto taxpayers, while profit remains in private hands? If it happens with regularity, it starts to look less like a "natural business cycle" and more like a huge fucking swindle.
Who ends with the profits and the assets? Lenders. Who ends up with the debts, the broken lives, the drained-out savings accounts, and a sham of a government assistance program? The middle class. Who winds up paying the bills and sweeping up the mess? Taxpayers. Dare i point out the racial dimension of the crisis as well?
It's not the way capitalism is "supposed" to work. But it's probably the way it's designed to.