Friday, September 26, 2008

The Slippery Slope to Socialism

Capital must be made to flow, rather soon, or the whole economy will seize up like an engine running without oil. Farmers need credit to buy seed, small business needs credit to buy materials, and homebuyers need credit to buy homes. If everything stops, how will we ever get it started again?

The Paulsen proposal started out by saying, Hey, we’ll just inject some billions into the financial system. Democrats cried moral hazard. The compromise was strong oversight. (As Wanda Sykes says, “Oversight? I want receipts!”). But that was not enough for some apparently and the idea of government equity (ownership) was proposed as a condition of the financial aid. But that amounts to nationalization of the company.

Republicans have scuttled the Paulsen bailout plan, at least for now, because it goes against their genetically fixed instincts for wild and woolly, free-market enterprise, and their equally inborn revulsion of government regulation and intervention. The bailout plan is nothing less than a “slippery slope to socialism,” I heard a Republican lawmaker say on television recently.

That is a rhetorical fallacy of course called, aptly, the “slippery slope fallacy,” also known as the “continuum fallacy.” You can Wikipedia it.

A Republican may say that the bailout plan is just one step along the path to full socialist government, but maybe it is just a particular course of action designed to address a particular problem.

Socialism is not a bad thing. Insurance is socialism: it transfers wealth from the healthy to the sick. We need insurance, just as we need Medicare, Social Security, and progressive taxation. The U.S. military is about as pure a model of a socialist government as you could hope to find. The government takes care of the soldier’s every need, in exchange for service, while the rest of us pay. There is nothing wrong with some socialism in a market economy. Some transfer of wealth from richer to poorer is necessary to offset unrelenting transfer of wealth from poor to rich in the free market economy. No reasonable person could be opposed to a little bit of balance like that.

Still, I balk at nationalizing the financial industry, or major parts of it, and here I am in sympathy with the Republicans. Strong regulation is one thing, which I favor, but when the government starts owning the means of production, we have indeed taken radical action.

Why would the government want to be in a position of owning major stakes in financial companies? Do we seriously believe that the government, as a major shareholder, would be utterly passive, never exercising its owner’s right to meddle? That is inconceivable. Is the government even competent to direct that much money? The evidence of recent history would argue against it.

Financial institutions do not have enough operating capital, because it is all sunk into worthless mortgage-backed bonds. Instead of buying the worthless bonds at inflated prices, which is effectively a giveaway, why doesn’t the government simply loan the money to the companies? They can keep their stinking bonds and if they turn out to have some value in the future, they can count their lucky stars. If not, they can at least use the loan to right the ship, and pay it back with interest as time permits. The alternative is to cease to exist.

Republican representative Eric Cantor of Virginia, has suggested government-backed insurance for the troubled firms as an alternative. He apparently does not realize that insurance is a type of socialism. It’s a bad idea anyway. It didn’t work for Fannie and Freddie, and it doesn’t correct the fundamental lack of capital in the system.

One could argue that cash for an equity stake is really just a loan with equity collateral. The trouble is that the equity owners have a tendency to want to run the show, and that’s the flaw of any nationally owned company. Government does not have the requisite skill to run the show, but will surely try to do it anyway.

It needs to be a clean loan, collateralized by a creditor’s right to be paid by a bankruptcy court.

Alas, nobody in government listens to me as they should!

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