Wednesday, October 15, 2008

Thoughts on Bailouts

Isn't it interesting that pro-capitalist conservatives have pushed for governmental intervention into our capital markets. Even going so far as to the federal government take equity interests in major financial institutions. I have been concerned for years that so many individuals and corporations were basing their decisions upon best case scenarios regarding the future values of collateral and the income of those whom they lended to. If those assumptions didn't hold true, what would be the result? Some financial institutions hedged their bets and acted prudently. However others sought maximization of profits disregarding the risks. And though the government allowed such actions, they did so under pressure from the lobbyists from these organizations. But ultimately, this failure was a failure of corporate governance. Boards of directors have a responsibility to those they represent, to not only maximize profits, but to mitigate risks. Many of these boards batted .500, and though that works in baseball, it doesn't in finance.

And now we find ourselves with a federal government being asked to intrude itself as equity partners in financial institutions. As partners, they should have a role in corporate governance and you could feasibly see members of the board from the federal government, all while federal regulators, serving a different function examine their books and making recommendations to minimize risks. I know in credit unions, regulators evaluate credit unions using a 'CAMEL' rating. These stand for Capital, Assets, "Management", of which management includes the role of the board. So now, you may have federal regulators regulating board members who may be members of the federal government. Say what?

Honestly, I am still digesting what has happened during the past couple of weeks. I am an old school financial institution junkie. I take great pride in the role my own financial institution has played in economic growth for small and medium sized businesses. I view the federal role as a regulator, not as an equity partner. Admittedly the model for many other countries is a federal/private partnership in the financial markets. This isn't the United State's tradition, despite some important and often times useful regulations and oversight.

I have my concerns about where we are going, not because of ideology, but because of workability. This may all turn out fine. But this is an awkward and paradigm changing process for the federal government. The federal government, treated as the scapegoat under Ronald Reagan, is now asked to be the white knight. To say this change in policy and outlook is monumental is to be an understatement.

4 comments:

David said...

Nobody who favored the bailout is a capitalist - no matter what they profess. They are either socialist or else weak and unprincipled politicians. Those who want to vote for socialists are free to do so, but we should at least be weeding out all those who are weak and unprincipled. (Is there any provision for removing both of our senators from office before the end of their terms - because both of them fall into that category.)

Obi wan liberali said...

David, I'm not much into labels. Most governmental actions are not socialistic and in my view, socialism is one of the most over-used terms our political vernacular has. However, the bailout has a socialistic element to it if the government becomes an equity partner with private sector financial institutions. This is a line of demarkation over past precedents. This is not unique within the western world, but it is unique for our country.

The irony, is that for so long, the strongest advocates for free-markets, were so willing to call upon the government to help them out in "their" time of need. Was it the right move? Time will tell. I've articulated my concerns. Maybe they are overblown.

But the complication these actions take within the framework of American corporate governance and regulatorial oversight are things that will have to be worked out on the fly, because we have no precedent for these types of actions.

David said...

I may have thrown the term socialist out too broadly, but I still contend that nobody who really believes in capitalism could support the bailout. I honestly believe that the majority of those who voted for the bill are simply ignorant of the repercussions of this action. Mostly they are just making things up as they go along with the single aim of keeping their positions - with the basic belief that inaction is the fastest way to lost their seats.

Obi wan liberali said...

You make some good points David, but "capitalist" is a label. You could argue that there or capitalists in China who are driven by market principles.

In Japan, a widely viewed capitalist country, the level of coordination between Japanese government and their own capital markets is considerable.

I have strong misgivings about the bailout, but the political reality was there atleast had to be the perception of bold action. My point has been, I'm not sure people realized the implications of the actions and the precedents they set.

Who is a "real" capitaliist? That's like arguing "who is a "real Mormon", or "real Keynesian", or as some have said of me, "you aren't a real Democrat."

Pure laissez faire capitalism has always been nothing more than a theoretical construct that has never really been practiced, and thank goodness it hasn't.