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The Perverseness of Bailouts as Solutions

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Certain institutions such as AIG, with financial roots that go deep enough and far enough, especially in the murky and unfathomable world of derivatives, have apparently achieved the 'holy grail' of institutional permanence by being dubbed too big to be permitted to fail regardless of or, in this instance, in spite of their sordid and costly behavior. As William Greider stated in a July 18th, 2008 interview with Bill Moyers, "they've [AIG and other such institutions] got what might be called a no-lose proposition. It's a wildly grotesque transaction where the public [their tax dollars] guarantees the life of these firms...", with little or no terms or conditions placed on these institutions, nor any liability or consequences for engaging in what amounts to 'usury'. It is nothing short of compelling the victims of serial robberies to swallow their losses and pay for the rehab of the victimizers who in addition, now have a chance to cash in on their ruinous and self-indulgent behavior without even a hint of restitution. In all of this talk about bailouts, there is a remarkably little reference to the notion of criminal misconduct and restitution.

In fact, it appears to have become common practice for the heads of large corporations such as AIG to deflect charges of rampant profiteering by offering that they were legally bound to maximize profits on behalf of their shareholders. But as it turns out, these captains of finance have instead, brought the entire U.S. and perhaps global economies to the brink of collapse, violating the very legal obligations they touted they were duty-bound to uphold. Can we therefore, expect criminal charges any time soon?

Perhaps more importantly, what are the lessons to be learned by the cascading taxpayer bailouts of AIG and others? That growing companies should bulk up by buying banks or financial firms in the hope of becoming sufficiently big that the fed can no longer allow them to fail, despite their behavior? That it is economically preferable to bail out large, so-called 'can't-live-without' companies that have engaged in 'usury', yet it is economically untenable to help affected homeowners keep their homes, or to provide universal health care for all despite surveys showing that unprecedentedly large majorities of the population strongly endorse universal health care? That it is economically feasible for the fed to prop up the 'big three' U.S. auto manufacturers despite the fact that they elected not to compete with companies such as Toyota, to produce more efficient automobiles, choosing instead, to lobby aggressively and successfully against all attempts at raising fuel efficiency standards for nearly two decades?

And while on the topic of 'big', perhaps one of the key questions going forward is, how big is too big? Why, for example are oversized organizations such as AIG in our collective best interest, especially when left unregulated to feast without fear or penalty in an orgy of greed and corruption? Why instead, is it not in our best interest to have a number of smaller, more competitive institutions whose individual failure, if it came to that, would not result in the unraveling of the entire U.S. and possibly global financial systems? There is an elegantly simple yet time-tested adage that strongly advises against putting all of one's assets in the same pot.

Unfortunately, it appears that such wisdom has long been cast aside in favor of deregulation and no oversight, especially in the world of derivatives, apparently predicated on little more than ideological notions such as ‘free markets’ and 'trickle-down' economics. There were and remain to be eminently good reasons why monopolistic practices and the 'super-sizing' of institutions were once discouraged as threats to our broader economic stability and well-being.

While the fed is feverishly engaged in what amounts to hurried attempts at plugging the leaks in the financial dam, one by one, in the hope that it can stem the economic tide before the dam breaks or before it runs out of taxpayer dollars, it would be folly to lose sight of the fact that what is really needed is not an endless string of rear-guard actions to address individual leaks, but a long-term solution in the form of a massive restructuring of financial institutions and the establishment of an effective system of regulatory checks and balances, devoid of ideological delusions. Yet there are reasons to be concerned about whether or not there exists a quorum of elected officials who are sufficiently courageous and sufficiently uncompromised by what might aptly be described as the culture of Wall Street, to successfully mount and lead a massive reform of the scale necessary to deal with the scale and longevity of our financial crisis.

 

Anthony Socci, Ph.D., is a Senior Science and Communication Fellow with the American Meteorological Society in Washington, D.C., where he is the host of a monthly series of briefings on environmental science and policy issues and is actively (more...)
 
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