Blog author: jballor
by on Monday, September 29, 2008

Last week an email newsletter from Sojourners featured a quote from U2 rock star and activist Bono (courtesy the American Prospect blog):

It’s extraordinary to me that the United States can find $700 billion to save Wall Street and the entire G8 can’t find $25 billion dollars to saved 25,000 children who die every day from preventable diseases.

The quote is pretty striking given the current shape of the debate over the Wall Street bailout. Bono’s insight is instructive: Once the government takes upon itself tasks that fall outside its regular purview, how do we rightly adjudicate between all the different needy causes? It simply becomes a game of which special interest can hire the most lobbyists.

Indeed, the $25 billion that Bono points out would be necessary to save 25,000 children a day is the same amount that the US government just paid to bailout the domestic auto industry over the weekend.

If the feds are willing to dole out $600-700 billion in corporate welfare for Wall Street, it only seems right that poor families and individuals get their own relative share of government redistribution.

The size of the government bailout relative to the critical debate about the execution of these policies is positively shameful compared to the fiscal cost of the war in Iraq (roughly $560 billion on the upper end) and the critical attention that the war has and continues to receive. Of course dollars aren’t the only costs we’ve incurred in the Iraq war, but they are one salient measure.

On the one hand conservatives often point out that government involvement in provision of welfare should be sharply curtailed or eliminated because it isn’t primarily the government’s task to directly offer assistance to the poor. Rather, that’s the job of institutions of civil society, like church ministries, non-profit charities, and groups promoting individual giving. So it seems inconsistent to claim this and at the same time assert that it is the government’s responsibility to bailout overextended (and therefore irresponsible) corporations with taxpayer money.

UPDATE: A HuffPost blogger takes this logic to its political terminus (emphasis original):

The Democrats, if they truly constituted an opposition party, which they prove every day they do not, could demand that if monies are going to go to bail out Wall Street, at least an equal amount would go to bail out average Americans in the way of health care, full funding for social security and medicare, mortgage and rent protection, infrastructure repair, decent public transportation, investment in green jobs and technology, etc.

One great virtue of the market is that over time it tends to punish bad players. Those who engage in unsustainable business practices will eventually get what’s coming to them. Debt catches up with you and you go bankrupt (unless in an election year cowardly politicians aren’t willing to let companies pay the due penalty for their error).

There’s been some talk about the moral hazards associated with the bailout. One moral hazard is that bad business practices aren’t going to be appropriately punished, and so such short-sighted and unsustainable behavior will be incentivized by reduction or elimination of risk. There’s now going to be an implicit government guarantee of corporations that are “too big” or too important to fail. The cost of this bailout may be $700 billion, but it sets a precedent for future bailouts whose costs are inestimable.

But enough hasn’t been said on another moral hazard that has to do with the good players, people who didn’t take out gimmicky mortgages to finance half-million dollar homes or rush into home ownership when they should have been renting. That’s the flip-side of bailing out bad players…good players get punished and are less likely to continue responsible behavior. And in the face of a government and businesses that are telling us to spend all we can, why should we be financially responsible?

  • Roger McKinney

    As long as fractional reserve banking continues, which will be forever, good people will get hurt in the resulting financial crises. But those same good people will be hurt less than others if they continue their good practices. In addition, they might not get hurt at all if they will learn a little economics. But it’s hard to get people interested in economics. I can clear a room full of people just by mentioning the topic. People leap out the windows. But if you understand the business cycle that fractional reserve banking causes, you can not only protect your wealth, but profit from it.

    For example, I only recently began learning about the Austrian Business Cycle Theory, but I pulled all of my retirement money out of the stock market last June because of what I had learned. As a result, I have missed the volatility in the market since then. When the ABCT gives me confidence that the economy has reached bottom, I will be able to buy into the stock market, or housing market, at blue light special prices.

    Good people don’t have to get hurt in financial crises, but they have to learn some economics to prevent it. Those who refuse to learn deserve the pain.

  • http://www.cdobs.com John Powers

    I have a neighbor that worked at Bear Stearns and had his life saving in Bear Stearns shares. He is wiped out, unemployed and cannot pay for his kids education. He is reasonably honest, but has certainly been punished.

    Doling out punishment is not much of a long term economic strategy. The regulatory environment is botched and has certainly been the major factor in the current fracture.

    If the counterproductive regulations aren’t fixed, there certainly will not be the resources to relieve the 25,000 children Bono speaks about.

    JBP

  • http://blog.acton.org/ Jordan

    It doesn’t seem to be the case that the blame can be laid solely on the demon of “deregulation,” but that bad regulations, over-regulation if you will, had a major contributing part, beginning with the Community Reinvestment Act and proceeding from there.

  • http://www.cdobs.com John Powers

    Jordan,

    I don’t think regulation is solely to blame, but what should have been a minor blip (how long can we actually stay at an all time high in home ownership? wouldn’t it naturally be cyclical?) is certainly made worse by nutty accounting regulations and the CRA etc.

    The housing and banking industries are regulated well past the point of diminishing returns.

    JBP

  • Roger McKinney

    John, I feel sorry for your friend who worked at Bear Stearns, but I can’t imagine anyone putting all of their money in one company. He is being punished for being a very unwise investor. I love economics so I find it hard to understand that other people don’t. But those who refuse to learn any economics or follow basic investing principles are going to be hurt again and again.

  • http://www.cdobs.com John Powers

    Sure Roger,

    But my point is that the market is punishing enough without the politicians stepping in to kick the bankers while they are down. These guys (bankers) are typical humans and make mistakes in business.

    A lot of people put all there eggs in one basket, and in up times, do very well, but it sure ups your risk profile.

    JBP