What Does the Libertarians’ “Ideal” Bailout Look Like?
James Hanley on Sep 30th 2008
Reader Alan Scott asks a good question:
If this is a bill that must be passed to prevent worse tragedy later, then I’m a bit curious as to the libertarian take as to what the bill ought to look like.
I’m honestly not sure what the answer is. Obviously any bailout bill is anti-libertarian, so it’s a question of what type of bill is least offensive to the libertarian perspective. I’d like to hear what our readers and my co-bloggers think, because collectively we’re a lot smarter than I am by myself.
I’ll just start with this and hope it gets the ball rolling:
- Government should not have an ownership stake in the affected firms.
I actually think there’s a fairly good argument for such an ownership stake, but it seems to me to be the greatest possible level of government involvement in firms short of outright nationalization, so surely it ought to be off limits in the libertarian bailout bill.
Filed in The Basement
If a private investor had the money to bail out these corporations, then he would certainly demand an ownership stake. I’m not saying that this means federal ownership is the best policy. But you can see the analogy.
I agree with Jason. Not only do I think govt should have an ownership stake but I think they should get MORE than what they pay for as a punitive measure.
This is why I said there is a good argument for an ownership stake, because of precisely this analogy. But is that really the more libertarian approach?
Government ownership of individual firms is less scary than government nationalization of an entire sector, which ownership of individual firms is not. Government qua government is scary, but government as merely a business-owning entity is not per se scary. If ownership of firms tempted the government to favor those firms legally, then that might be scary, but not necessarily any more scary than government favoring business who lobby the government. Throwing taxpayer money down a black hole is scary, and that is my impression of what the bailout is likely to be in its current form. Saving people from the consequences of their own folly is scary, because the expected result of that is to deepen the underlying problem.
James, you say that the most libertarian approach is that which minimizes government involvement. But wouldn’t a better standard be to instead minimize force?
The way I see it, There are three potential targets here:
1) The taxpayers. We’re being forced to pay $700,000,000,000.00 to fix other people’s messes–clearly the best way to minimize force against the taxpayer is to reduce that pricetag and/or to ensure that we get more of that money back in the long run.
2) The companies with all those bad debts. I don’t have a lot of sympathy for these folks–they’re sitting at the bottom of the hole they dug, and they’re being thrown a very expensive rope. The obvious way to minimize force is to make participation in the plan voluntary.
3) The folks who owe the debts in the first place. If you thought that our personal bankruptcy laws were harsh when corporations were given an undo say, imagine what they’ll be like if the government itself owns the debts.
The way I see it, ownership is a way to reduce force against the taxpayers by cutting the government in for a greater portion of the profits. There’s also a potential to create a ‘virtual reduction in force’ against the debtor companies. The way I see it, the government is probably going to require them to manage their debts in certain ways–And these requirements will be less onerous when imposed as shareholder resolutions rather than Laws.
Of course, such an arrangement invites force against the debtors themselves.
Hmm, Alan Scott has proffered an interesting twist on the issue. It looks, to my surprise, as though government ownership stakes in these firms might not be anathema to libertarians.
This conversation is definitely not taking the path I had expected it to.
My concern about government ownership is the government’s ability to use control of a major player to attempt to control the sector. If one powerful firm has the resources of the government to boost its competitive power, the other firms in the sector must beg for government assistance to stay competitive.
We must keep in mind that we got into this mess largely because two of the major players (the FMs) had politically set goals, and had the power of implicit (at least) government backing. What is the effect on the financial markets if the government has some degree of control over a few more major players?
Given the range of (all bad) options, Alan Scott may be right. But it makes me very nervous. If government ownership is to be part of the picture, I hope there is a way to divest as soon as is practical. Unfortunately, once the politicians have a piece of something, they don’t like to let go of it.
If ownership of firms tempted the government to favor those firms legally, then that might be scary, but not necessarily any more scary than government favoring business who lobby the government.
I expect that the government always favors the firms it owns, no matter how badly they perform.
But with that said, I might still have to side with Alan Scott, albeit for a different reason.
If the bailout just gives the money to Wall Street, then there is no chance of ever righting the wrong. The money is gone. But if the government takes an equity stake, it can eventually sell that stake, and partially compensate the taxpayers.
Am I way off base here? I freely admit I might not be understanding the issues.
What Does the Libertarians’ “Ideal” Bailout Look Like?
I’m tempted to call the question nonsensical. It is rather like asking, “What does the libertarians’ ‘ideal’ omnibus farm bill look like?” Answer: it’s invisible.
The only libertarian argument I can think of for a bailout is that it will forestall economic catastrophy, thus averting widespread demands for even more economic intervention. (One might come up with pragmatic arguments for a bailout, but that’s hardly the same thing.) But such an argument is completely dependent on our compatriots. If one lived in Libertopia, in which even economic hardship does not result in calls for more government control, the libertarian attitude would probably be to let people work through the difficulties as best they could with no aid or hindrance from the feds.
Jason Kuznicki: “But if the government takes an equity stake, it can eventually sell that stake, and partially compensate the taxpayers.”
I think this is correct, but the “if” seems very unlikely, meaning the government can do far more damage over the long-term. If the government simply throws money at the problem, then the damage is done, for good or ill. If the government buys bonds, then the government has increased its current power as a market player but only in a limited fashion. If the government is a major shareholder, then Congress has a new way of exercising power that it will not want to surrender.
AMW, I agree that it’s a bit of a nonsensical question, and that the ideal bill would be, as you say, invisible. But I’m trying to ask, if there’s no way of avoiding a “visible” bill, what’s the best, or least bad, version of it?
James,
I would offer the following (I only claim original authorship of the last one):
1. Wall Street’s ability to borrow and lend is constrained by its capital requirements. Loosen those requirements by a) altering the mark-to-market accounting rules and/or b) shrinking the amount of capital necessary to lend.
2. Establish an auction where private parties, foreign and domestic, can bid on the securities. The price set by the auction stands in as the mark-to-market value of those securities.
3. Make it very, very easy (regulationwise) for foreign banks and governments to lend money in the U.S.
4. Make it very, very easy (regulationwise) for foreign banks and firms (but probably not governments) to buy U.S. investment banks.
5. Allow each U.S. citizen of voting age to give his choice of Barney Frank or John Boehner a swift kick to the groin.
Yeah, yeah, #5 doesn’t exactly fall in line with libertarian mores about violence. But we’re only opposed to the initiation of force, remember?
AMW, I’m not sure which of your ideas I like best, although I lean towards #5.
Just yesterday I heard about mark to market valuation for the first time–it sounds like it might be an important part of the problem.
The only problem with #5 is that it will likely induce decision paralysis.
I haven’t done a ton of background reading on the crisis, but Michael Flynn at Reason.com has the most cogent take on it that I’ve yet seen. I don’t know if he’s got all the details exactly right, or captured the whole picture, but it seems to be a good starting place.