Government bail outs and prohibitions

Some people think that the US financial turmoil in 2008-2009 was caused by free market or less government policies, that none of the major players responsible were arrested, and that the US taxpayers bailed out the fraudulent corporate system.

Hmmm, the fraud or criminals don't arrest themselves. The one who collects tons of money from the public is the government; the one who decides to use that tax money for private use like corporate bailout is the government.

Recall that in the literatures of the free marketers, almost all of them said one thing -- zero bail out, let those erring big banks and firms go bankrupt. Capitalism without failure and bankruptcy is like religion without sin. This chart below, I got from the web.

Business should be kept in the private sector as much possible and government should only lay down fair  and  transparent rules that apply to all players, and stay away from being businessman itself. In real capitalism, there is competition, almost anywhere, almost anytime. Then there will be success and failures; expansion and bankruptcy.

In cronyism type of business, bad companies get bailed out. Or a better term perhaps is that bad companies are protected from competition by good and efficient companies. There are so many government-created monopolies, area-specific monopolies like electricity distributors (Meralco + 120 other electric cooperatives), all water companies, etc. Some industries are duopoly like telecom.

The potentially good company/ies is/are prohibited, banned, disallowed by the government to compete and teach a bad local company a lesson. Via the Constitution (restrictions on foreign equity investments), via Congressional franchise, via Executive franchise (CAB, MARINA, LTFRB, NTC,...), via LGU franchise or business permit.

At least two schools of thought on government dealing with big players experiencing serious corporate crisis.  (1) bail them out, postpone the day of reckoning, and (2) let them fail, let the economy sort it out. Trying to balance both would exacerbate the situation.

Option (2) is always the optimal one. Capitalism without bankruptcy and failure is like religion without sin. So corporate expansion and bankruptcy are 100% part of the DNA of capitalism. When a government plays God and decides who should stay and who should go bankrupt, that economy is moving towards statism, even socialism.

Besides, when a corporation goes bankrupt, someone else will buy it, cheap of course, use or rehabilitate the useful assets, even assume the debts and liabilities, rehabilitate and turn it around, and manage or sell it for a profit. Bailing out a corp., public or private, using taxpayers' money is always wrong.

On government prohibition culture

Monopoly greed also occurs at the poorer/poorest sectors of the economy. Like a jeepney route monopoly (given by LTFRB) -- air-con vans, buses are prohibited from plying their route and get passengers. Or tricycle route monopoly (given by LGUs) -- jeepneys, air-con vans, mini-buses are prohibited from plying their route. Passengers have only two options, take a cab or Uber, or drive their own cars.

I entered UP, graduated in the mid-80s or more than 3 decades ago. The jeepneys monopolized the Philcoa-UP or Quezon Ave-UP route. Ok lang noon, no internet, no fb, etc. Now with all the modernity, those routes are still jeepney monopoly? Students and staff have no other choice but take the cab/Grab/Uber, drive their own cars? Air-con vans, buses still prohibited in UP?

That's the anti-development, anti-innovation governmentt prohibition culture. Never mind the majority, just pamper a few noisy but organized guys.

-------------

See also:
Joe Stiglitz and the Market, December 16, 2008
Rule of Law 3: AIG Bonuses, Government Bail-outs, March 18, 2009
NINJA loans, October 12, 2010
On the recent US housing bubble, January 05, 2011
Fiscal irresponsibility 12: More on US debt default, July 28, 2011

Fiscal Irresponsibility 21: Eurozone Debt, GDP and Unemployment

Europe and Eurozone's fiscal problems continue to wobble their macro economy as citizens keep paying more taxes and fees while their governments keep piling up more debts to the already high debt stock. Below are screen shots of a CNN feature, "Eurozone Crisis: How the figures stack up",  http://edition.cnn.com/SPECIALS/business/euro-crisis/index.html?hpt=hp_c1

All data accurate as of January 11, 2012.

(1) Debt/GDP ratio

Greece leads the pack in this infamous category. Out of the 17 economies here, 12 have exceeded the Eurozone cap. France and Germany's ratio at 83 percent of GDP.

(2) GDP size, $ billion

The largest economies, Germany and France, naturally are the one which have the biggest capacity to bail out the most troubled member-country of the Eurozone. Germany's GDP size in 2011 was $2.567 trillion.

(3) GDP growth rate, 2011

Last year, Greece and Portugal's economies have contracted, and only five economies were able to grow by 2.9 percent or higher. Heavy debt load will naturally lead to lower economic outlook and low or negative GDP growth.

(4) Bond yield, percent

Greece, Portugal and Ireland have breached the "danger zone" in terms of high interest rates for their new debts. Unless the new debts are able to really improve the overall economic productivity of the people and hence, improve the capacity to pay the old and new loans, new borrowings will only further worsen the problem.

(5) Unemployment rate, percent

More debt, more economic uncertainty, more unemployment. Spain's 21.3 percent joblessness rate is really troublesome.

(6) Youth unemployment

The situation is even worse for youth unemployment, with 11 out of 17 economies have 18.3 percent or worse in youth unemployment rate.

The governments of those heavily indebted countries in Europe and elsewhere like the Philippines, are not exactly "helpless" and "optionless" aside from more borrowings. Those governments have lots of assets, like government-owned or controlled corporations, banks and other financial institutions, lands and national parks, universities and hospitals, to sell and privatize. The governments will not abolish these, they will only be sold these usually monopoly bodies to private enterprises. Such privatization should be accompanied with deregulation so that it will not result in government monopoly to private monopoly.

Selling those assets are a lot more acceptable to the average citizens than more taxation. But I can imagine the opposition to such proposal by the employees and officials of those government-owned and controlled bodies and assets, especially for socialist-inspired or leaning governments.

But there should be a limit and stop to the endless borrowing mentality and policy. Because there is also a limit to the capacity of lenders, be there individuals, private enterprises and banks, or foreign governments. No one would keep lending to someone whose capacity to pay back in the future is next to impossible.
--------

See also:
Fiscal irresponsibility 11: US debt default talks, July 18, 2011
Fiscal irresponsibility 12: More on US debt default, July 28, 2011
Fiscal irresponsibility 13: Obama on debt limit, 2006, August 02, 2011
Fiscal irresponsibility 14: Debt crisis and government failure, August 08, 2011
Fiscal irresponsibility 15: Philippine government budget 2012, August 08, 2011
Fiscal irresponsibility 16: On government bail outs, September 11, 2011
Fiscal irresponsibility 17: Cut Spending and Borrowing, September 19, 2011
Fiscal Irresponsibility 18: Greece Bailout, October 29, 2011
Fiscal Irresponsibility 19: Rich Countries' Debts, November 24, 2011
Fiscal Irresponsibility 20: Trade and Budget Balances, January 06, 2012

Rule of Law 3: AIG Bonuses, Government Bail-outs

A corporation aiming to keep its bright people to produce bright work needs to provide them bright incentives. Bonuses are one of such incentives. So when AIG decided to give bonuses to its people who stuck with it through these past few months, so that those people will help the company recover from its shameful position of being bailed-out by a government just to escape bankruptcy, AIG was doing the right thing.

Unfortunately for AIG, by soliciting and accepting bail-out money from taxpayers and the politicians in the first place, AIG has politicized its corporate nature. It has abdicated its corporate independence and embraced political dependence. The moment it accepted the bail-out money, it should expect intervention anytime anywhere by politicians and taxpayers. The current howl against AIG giving bonuses to its personnel is understandable, but AIG's desire to keep its people is also understandable, and that those bonuses are stipulated in the contract between the company and its personnel, and that contract was made before the financial crisis emerged.

If the rule of law is to be respected, US legislators and the President should stay away from internal arrangement and contract between employers and employees. The rule of law also stipulates that AIG should pay each and every single dollar and cents that it owed the US Treasury. There are harsh penalties if the debtor will not fulfill its obligations. This gives teeth to the rule of law.

If giving bonuses will keep good staff or attract new people who can make the company recover financially so it can pay all its debts to the government and other private creditors, so be it. What the US politicians and taxpayers are howling is that by giving huge bonuses at the time the company is bleeding financially and asking for billions of $ of bail-out money, the likelihood of that company paying back all its debt to the government and taxpayers will become small.

The politicians and bureaucrats who extended the bail-out, as well as private citizens who supported the bail-out, are playing double-talk when they howl against the AIG bonuses. Governments and corporations have their own set of profligacies and wastes. That is why it is important that they keep to themselves those profligacies, and not extend or infect the other. Government bail-outs are perfect tools of co-inflicting those profligacies.

Should AIG justify and proceed the bonuses?
I say Yes.
Should AIG get more bail-out money?
I say No.

AIG should limit the foolishness of losing its corporate independence and embracing political dependence. The sooner it can do it, the better for its staff, shareholders and clients. By cutting or reducing its bail-out loan, the better. When it has brought down its bail-out debt to zero, then it can give double, triple, or whatever multiple, of current bonuses or whatever profligacies to its people.
-------

On a related note, I wrote this last October 07, 2008:

Failing Big Business Marries Big Government

One Cato scholar I read said the Democrats and other big-government advocates among the Republicans passed the bail-out bill because it will give them additional power to regulate big banks and other financial institutions, on top of SEC, Fed, other US government agencies' regulation work. He called it, "where failing big business marries big government".

Private enterprises should be allowed to grow big or go bankrupt -- without government intervention. The job of the government is to ensure the rule of law, that parties honor their obligations and contracts with other parties, and that robbers, thieves and killers along the way are neutralized.

Meanwhile, I am wondering where the left, the socialists, anti-imperialists, the anti-capitalists, anti-market, etc.. position themselves first on the bail-out debate last week, and the implementation of the bail-out and more regulations in the coming weeks and months as a result of the bail-out law.

If they have to be consistent as leftists and socialists, they should have clapped and supported the bail-out plan and its full implementation. Because it means more taxes, more regulations, more protection for the irresponsible.

Leftists and socialists who oppose the bailout and its future implementation have no right, or are inconsistent, to do so. The job of opposing more government regulations and taxation is the task of the free marketers, not the statists and leftists.

About the Lehman brothers investigation in the US congress yesterday, I was curious -- why did Congress investigate the firm that the government did not rescue and now bankrupt? Why did it not investigate first the firms that got tax money, that's why they're not bankrupt yet? Why save IndyMac, Fannie and Freddie, and AIG, but not Lehman and Washington Mutual?

Regulators and politicians who chose whom to save and whom to allow to sink, whom to investigate and demonize in a congressional hearing and whom to spare from investigation and given tax money, are practicing double-standard. So I don't see the logic of trusting the same regulators and politicians or institutions to do more regulatory powers. Only big government can do such double standard.

Have no sympathy for Lehman and its top executives who were receiving millions of dollars in compensation and perks while the firm was bleeding. It's good that such firm has already collapsed. But the same corproate callousness and irresponsibility could be said of Freddie and Fannie and other firms bailed out and soon to be "rescued" by the US government.
-------

See also:
Rule of Law 1: Entrepreneurship and Government Permits, September 16, 2008
Rule of Law 2: Property Rights and Lefts, March 02, 2009

Inflation and CBs 5: Capitalism Without Failure is Like Religion Without Sin

Capitalism without failure is like religion without sin. The statement is from a CATO scholar, Gerald P. O'Driscoll Jr., in his paper, "Treasury's Thieves". Perhaps people should keep that in mind before they conclude that the current financial turmoil in the US, which is spreading to financial markets abroad, marks the beginning of the "end of capitalism".

The current financial "meltdown" should happen. If the meltdown does not happen today, then it should happen tomorrow, or next week, or next year. And it should continue, if only to weed out the irresponsible corporate leaders and the cheaters.

What should not happen is a government bail-out of collapsing and imploding big banks and firms. In this case, the proposed US government bailout for the financial sector to the tune of $700 billion -- not counting the projected budget deficit of more than $480 billion by the end of 2008 of the federal government alone (many states, cities and counties have their own sets of budget deficits).

So why is government bailout not justifiable? Three important reasons.

One, make those responsible for a corporate collapse be accountable for their mistakes. Hence, they should pay the price for their irresponsibility and misbehavior. Those who should sink must sink. And taxpayers' money should not be used to bail out irresponsible corporate guys.

Two, governments by themselves have no money on their own to bail out failed enterprises except for what governments confiscate from the income and savings of the hardworking citizens in the form of various taxes, charges regulatory fees and fines, or by printing money endlessly through their central banks, which can push inflation upwards endlessly, and thereby rob again the responsible citizens of the real value of their income, savings and investments.

And three, the US Fed's and other central banks' (like the Europe CB) large-scale bailout pool and consequent monetary policies will be distortionary. In cases like this, producers and manufacturers are forced to watch the behavior of the Fed or any central bank on whether it will raise or lower or keep existing interest rates, or protect the currency from further depreciation or appreciation, rather than watch the behavior of consumers (if their preferences and buying pattern are changing or not) or the behavior of competing producers from other countries (if they are producing better quality goods and services or selling at lower prices or a combination of both).

High inflation is caused mainly by lower supply relative to demand. So to address high inflation, expand supply relative to the size of demand. But central bank bureaucrats think they can solve the world's price problem by centralizing monetary tools in their hands, and squeeze money supply by tightening credits and raising interest rates -- which in the process choke many entrepreneurs and producers, both big and small.

The term "socialism for the rich" (under a longer phrase, "profits are privatized but losses are socialized") is wrong. The proposed multi-billion dollar bailout can be aptly called "socialism for the irresponsible" because only irresponsible and envious people would love socialism. Under socialism, the lazy and the envious will still eat, will still have allowances, and will be entitled to free "quality" education, health care, housing, etc. because social equality is non-negotiable.

For the socialists or trying-hard socialists, personal and corporate responsibility or irresponsibility do not count much. What matters to them is more "government responsibility" . So, corporate irresponsibility of officials of those big firms don't count much, those firms are "too big to fail", they should not sink, and their officials need not go to prison.

Some people ask, "Who are the irresponsible? Who defines 'irresponsibility' and who should penalize them?" There can be a BIG political battle on the definition of "irresponsible" because among the most irresponsible institutions involved in the current financial "meltdown" is the BIG US government itself.

It is easy to spot an irresponsible guy or institution: they live beyond their means, consistently. They spend much bigger than their income or revenue, consistently. Or worse, they spend and ask for more subsidies even if they have no income, nor have any plan to work and have regular income. A person who in his late 20s or 30s still depends his parents' allowance is irresponsible. A bank that lends to many people, who it perfectly knows have no jobs or no stable jobs and income, is irresponsible. A government on budget deficit, for one, two, five decades or more, is irresponsible.

So, how should they be penalized? The penalties for cases like failed companies are already in the books of any country's legal system. Bank or corporate officials who lose their stockholders' money should go to prison, or the cemetery perhaps -- in the case of those unlucky to be caught by really mad and impoverished investors.

After the US government announced the huge bailout fund that it seeks from the US Congress, the US stock markets were battered once more, the US dollar was knocked down further, and even world oil prices were up once more.

Why? It's the distrust on the US government, distrust on any fiscal "stimulus" by a bailout scheme because of the big taxes and fees that will be confiscated from the pockets and monthly salaries of US citizens in the coming months and years.

A friend shared that the proposed Treasury bailout plan has this provision:

Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Dictators hate for their work and decision to be reviewed and questioned. "Non-reviewable" clause by any court or any agency speaks of the absence of accountability and transparency, absence of personal and official responsibility, for any mistakes in the future. If they are not dictators, then they should be fully transparent and fully accountable for their actions and policy decisions. If they do not want to be accountable for any future mistake, then they should not initiate such bailout move in the first place.

The pattern and the dangers are there: individual responsibility is meaningless under a socialist or trying-hard socialist framework. Everything is "government responsibility" . The primacy of the collective over the individual, always. And in their books, to have order in the collective, each individual -- except the administrators and governors of the collective -- must surrender a big portion of their income, their savings and their personal liberty, to the collective. Then there will be order in society, harmony and equality. Perhaps equality in misery.

Again, corporate failures and bankruptcies, as well as expansion and becoming big, are part of the game under a capitalist set-up. Market failures almost always result in market solutions, unlike government failures that almost always result in more bureaucracies and offices to find out how much have been wasted and stolen already.

Here at home, if Metrobank or BDO or BPI would "collapse" someday for whatever reason, taxpayers should not support any bailout by the government, whether through the the central bank (BSP) or congressional appropriation. Let any big but misbehaving ship sink if it must -- that's fair game, and this alone will put enough pressure and discipline on existing banks, corporations and enterprises not to act irresponsibly. Government has little or no role on private contracts between stockholders or owners and corporate officials, except with its usual role of a parasite -- collecting high and dozens of different taxes when one or two taxes will suffice.

* See also: Inflation and CBs 4: Subsidies and Money Printing, August 17, 2008