A lot has been written about the bailout of bankrupt investment banks and an insurance company by the US government, which now takes the US federal government debt to about $14.8 trillion. In the excitement, the fact that this level of government intervention is occurring in an ostensibly capitalist nation is overlooked. What are the consequences for the freedom seeking person?

Is it the role of government to intervene in the economy? What would happen if they didn’t? The old role of government was to provide the framework that allowed people to live their own lives in the way they see fit, to pursue happiness (however each person experiences that), and allow them to sow what they reap without fear or favour. At one point, the US was the wealthiest and freest nation. Now government appears to want to interfere with every aspect of business and personal life.

The bailout decision is now made, so we can only speculate about what would happen if they didn’t but it is likely that a number of financial institutions would fail.

I used to work in risk management for a multi-billion dollar bank. My job was to model the impact of extreme financial decisions on the solvency of the bank and I can state that what they have done is poor banking practice.

They have either made extremely poor lending decisions, or purchased securities of other financial institutions who have done so, whilst paying themselves fat bonuses for their “skill”. These reckless decisions are made when the people who are making the decisions are ultimately shielded from personal responsibility for them. The buck stops with the senior management.

By intervening, this has saddled all taxpayers, including those who have made sound financial decisions with the consequences of private actions. The essence of free enterprise is that you are free to take the results of your own decisions. But now it appears that it is ok if a bank does poor lending. There is no downside risk. You can pick up a good profit in the short term, and if it all goes to pieces in the long term (if you haven’t already bundled it up and passed the risk elsewhere), the taxpayer will foot the bill. Based on this, we will perhaps see some more bailouts down the track.

When I was involved in investment banking, the skill that was required was in avoiding risk whilst maximising profit, now it appears that the greatest skill is in going for broke and then persuading bureaucrats that someone else should bail out your bank.

Without intervention, the banking system would not grind to a halt. Those who wanted to borrow money and those who want to lend money will still come together.

What is the most appropriate response? Is it to regulate salaries and bonuses? I have heard that offered as an option, and I cannot believe that anyone in the finance sector would allow a bureacrat to set their salary. This is another diversion – the false belief that more regulation and control solves the problem. The solution is simple – let banks take responsibility for their own activities. Don’t be fooled that the government can solve the long term issue – all that it does is mask the symptoms whilst encouraging the same behaviours.

America will pay a very heavy price for this intervention – far greater than allowing the banks concerned to naturally fail and be taken over. The increase in debt will cripple future generations and more will be taken in taxes, leaving less for taxpayers to use for their own benefit, or for investment in new jobs. The creeping socialism will have the same effect that socialism has had anywhere else it has been tried.

So, welcome to the socialistic state where fortunes are made by reckless bets with no downside, fat bonuses are paid for those who can shift the responsibility, and where those who still think that they should manage their own risk and take responsibility for their own actions have to foot the bill for generations ahead. The place where it pays to become a victim of fate and shift the responsibility elsewhere, and use the coercive power of the state to take what you want from someone else.

As a freedom loving person, I want no part of that (fortunately in my country our banks are sound). I seek to minimise the amount of my tax (and therefore the amount of my own time and effort) that can be confiscated. If I was an American, I’d do the same and also spread my own risk outside of my own country, away from the thieves and the shiftless professional victims.

Tags: bailout, corporate welfare, socialism

This entry was posted on Monday, September 29th, 2008 at 4:14 pm and is filed under Wealth and work. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.