Bailout: corporations yea, citizens nay. Nationalisation: US yea, others nay.

25 September, 2008

The Bush administration has been bailing out financial institutions with dazzling amounts of money. In return for those funds, the US government now owns controlling stakes in Fannie Mae, Freddy Mac and AIG. It has, moreover, done considerable favours to JP Morgan by helping bail out Bear Stearns bank without, though, demanding stakes, since JP Morgan intended to acquire the bank instead.

The amount of money involved in government support of these and other financial institutions has already run into the hundreds of billions of dollars. It is likely that another 700 billion dollar bailout package will follow when US congress votes for a proposal by the Bush administration to that end.

The moral hazard that such support entails is well known: welfare to support the unemployed has been successfully curtailed using the argument that such policies only stimulate people to remain unemployed. Whether or not those people and their families get into financial trouble, default on their payments, can afford to pay the rent or food for their children is considered secondary or indeed immaterial when considered against the severity of moral hazard.

Over the past decennia, welfare programmes have been cut with the argument that they cost too much to society. We could not afford paying for a national health plan, for guaranteed decent education for all, for unemployment support and the list goes on. The benefits of such programmes were deemed dispensable when compared to the upfront cost savings that their curtailment or cancellation brought about. The prospect of a generally healthy, educated and financially secure population has been confronted with the prospect of the top one percent of the US population enjoying extreme increases in wealth and lost the confrontation.

These are legitimate choices that societies make all over the world. The US happens to have made the choices it made. This year has seen the breakdown of much of the financial system in the US. Economists all over the world had been warning for years against the leverage of sub-prime investment vehicles on the entire financial system, but experts within that system invariably found more reasons to invest further into those instruments.

That is to say, the current financial crisis is unlike a natural disaster – it did not come unexpectedly, nor was avoiding it beyond our influence. Rather, it is the result of wilful ignorance on the side of what we call the financial experts. Their negligence precipitated the world into the financial crisis we are now experiencing. The lack of oversight and regulation in the financial markets worsened the impact of this crisis by the allowing the financial institutions that are now on the verge of bankruptcy to grow to a size that now threatens our economy. This lack of oversight and regulation, incidentally, was actively lobbied for by those same financial institutions.

The nationalisation drive that the US administration has been engaging in this past month pales many other initiatives abroad. When Hugo Chavez announced he would nationalise Venezuela’s petrochemical and telecommunication markets, he was talking about government intervention in the tens of billions of dollars. Similarly, Bolivia’s nationalisation of its natural gas fields did not exceed an estimated market value of 70 billion dollars. The difference – and the astute reader will have noticed this – is that while Venezuela and Bolivia acted in response to popular demand, the US bails out corporations with tax payers’ (current and future) money all the while refusing to support people faced with foreclosure.

Why does the US treat corporations better than its citizens? The administration could not find the money to pay for the health insurance of 4 million children, yet pressurises congress into approving a blank check for the Treasury to dispose of at least 700 billion to pass on to financial institutions. Also, how come the US can engage in nationalisation yet criticise other countries that do the same?

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2 Responses to “Bailout: corporations yea, citizens nay. Nationalisation: US yea, others nay.”

  1. Allen Taylor Says:

    Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  2. mbotta Says:

    thanks allen! i hope to read your comments here soon.


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