Over the last couple of months, we've seen a $700 billion bailout of the financial sector, the nationalization of AIG, Fannie Mae, and Freddie Mac, pleas for a bailout of the US auto industry, and emergency FDIC guarantees for everything from money market funds to gift cards (hat tip to Suzy Trotta for that one).
Randy Neal asked, where does it end?
I have no idea where it ends, but I think we should begin asking a more fundamental question: where does it come from? What factors in our economic system have permitted this kind of chaos to metastasize unchecked, until the entire system is imperiled?
I'm no economist, but part of the answer seems to lie in the fact that the American version of capitalism has always allowed (and even encouraged) the externalization of risks and consequences. In a purely entrepreneurial system, the investors in a company stand to lose their shirts if the business goes belly-up or lands itself in deep legal trouble. That threat works pretty well in companies that are privately owned, but the system completely falls apart when companies are publicly traded. For public companies, the shareholders shoulder the risk, and if the company goes bankrupt, shareholder equity is the first thing that's wiped out; this fully externalizes management's risks onto the shoulders of the shareholders, who end up with no recourse once their equity evaporates. Meanwhile (as we've seen with Lehman Brothers, Merrill Lynch, Bear Stearns, and AIG), the executives who steered the company into the ditch get to keep their salaries and golden parachutes.
This externalization of risk goes beyond merely the financial health of a company. From the very beginning, companies in the US have been allowed to push liability for risks away from themselves without consequence. This is by no means an exhaustive list, but here are some examples:
Coal companies are allowed to pollute our water due to mountaintop removal, and power companies are allowed to change our very climate by burning that coal.
Chemical companies were long allowed to pollute the ground, air, and water without liability.
Tobacco companies are allowed to sell and deceptively market a product whose toxicity cannot be mitigated.
Wal-Mart is allowed to decimate mom-and-pop stores in a community, then completely abandon the community when their corporate bean counters say it's time to move somewhere else.
Microsoft is allowed to sell profoundly insecure software without any culpability for the IT chaos, expense, and data theft that insecurity causes.
Companies and government entities housing your private data bear no liability for the nefarious misuse of that data when it is stolen, even if it's stolen due to their own negligence.
Given all those examples, it should be no surprise to anyone that the con artists on Wall Street felt no hesitation about palming off the risks of credit default swaps onto someone else. It should be no surprise that GM expects the rest of us to bail them out of their own bad management decisions. No one should be shocked to hear AIG ask the taxpayer to clean up after their negligence. That expectation is built into the system, from the ground up.
I'm not saying that legal liability doesn't exist in our system -- clearly, it does. I'm saying it doesn't go far enough.
(And before anybody on the Right gets all apoplectic about the "nanny state" bogeyman, I'm talking about two specific kinds of risk here: 1) risk that is hidden to outsiders, as with Microsoft's products, and 2) risk that we as individual consumers and taxpayers are powerless to mitigate, such as the housing of our private data by third parties.)
The damage to our financial system is already done, and the damage to our automobile industry is now coming home to roost. The cost of inaction in both cases would be catastrophic, so I'm reluctantly in support of government intervention to prevent our system from collapsing. But I think it's high time we revisited some basic assumptions about the way risk is allowed to fester and consequences are allowed to be palmed off in the American version of capitalism.
Simply put, the entity that triggers the risk should shoulder its consequences.
If Microsoft were held liable for data theft due to the insecurity of Windows, you'd see Redmond produce the world's most secure operating system so fast it would make Bruce Schneier's head spin. If Wall Street con artists were held liable for the collapse of financial instruments they hawked as being a bullet-proof hedge against risk, we might be able to have faith in our financial system again.