BAILOUTS ENCOURAGE UNJUST BUSINESS PRACTICES

BAILOUTS ENCOURAGE UNJUST BUSINESS PRACTICES

Zachary Karabell, President of River Twice Research and a Senior Advisor to Business for Social Responsibility, December 10, 2008.

“Government Bailouts: What's it All About?” HUFFINGTON POST. . Accessed 12-10-2008.

The prime question then and now remains the same: what precisely is the role and responsibility of the government to do something about all this? The tension of the free-market on the one hand and the responsibility of government on the other, the needs of the many versus the needs of the few, have never been resolved. While Washington and Main Street and Wall Street just now are in heated discussions and argument about what to do with the GSEs (the government sponsored entities known as Fannie Mae and Freddie Mac), underneath the policy plans is that unresolved issue of just how much government should do. Some, and usually conservative, highlight the "moral hazard" problem: bail people out and the negative consequences of bad decisions are never born, which in turn facilitates bad behavior as surely as giving an alcoholic a drink.

David Holcberg, Ayn Rand Institute, May 07, 2008.

“Bailing on Bailouts,” US News.com, . Accessed 12-10-2008.

Any government bailout of either borrowers or lenders would have to be financed with money taxed from other people—and that would be utterly unjust. Lenders knew—or should have known—the risks of making loans to individuals who had shaky finances and deserved little, if any, credit. And borrowers knew—or should have known—the risks of taking loans that they might not be able to repay. In either case, lenders and borrowers are responsible for their decisions and should bear the consequences of their mistakes (or misfortunes) on their own. Why should responsible, hard-working individuals who pay their mortgages and rents on time, or who already paid for their homes, be forced to pay also for the mortgage of others who defaulted on their obligations?

Ron Paul, U.S. Representative-Texas, November 24, 2008.

“Texas Straight Talk: The Bailout Surge,” Accessed 12-10-2008, .

By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use.  An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned.  But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones.  How this is supposed to be good for our economy is beyond me.

Nelson D. Schwartz and James Kanter, Staff Writers, September 8, 2008.

“How many corporate bailouts are too many?,” INTERNATIONAL HERALD TRIBUNE, Accessed 12-10-2008, .

Over the past decade, Washington has thrown a lifeline to everything from Long-Term Capital Management, a troubled hedge fund, to the airline and insurance industries after the Sept. 11 terrorist attacks in 2001. Now, Fannie Mae and Freddie Mac, the mortgage finance companies whose rescue plan was announced Sunday, are the latest to join the club. In all these cases, the overall risk to the American economy of an outright collapse was judged by U.S. policy makers to be greater than what economists term the moral hazard problem - the fear that the private sector will take on greater, even foolhardy, risks in the future as investors and major business executives assume that the U.S. government, with its essentially bottomless pockets of cash, will always be there to provide a backstop.

UTILITARIANISM DOES NOT JUSTIFY CORPORATE BAILOUTS

1. BAILOUT ADVOCATES IGNORE HOW THEY NEGATIVELY AFFECT ALL SECTORS OF SOCIETY

Robert W. McGee, Director, Center for Accounting, Auditing and Tax Studies at Florida International University, November 20, 2008.
“An Ethical Analysis of Corporate Bailouts,” SSRN Working Paper, Accessed 12-11-2008, .

A thorough utilitarian analysis would include an examination of the effects a policy has on all groups, both in the short-run and in the long-run. One of the major criticisms of those who advocate bailouts is that they neglect the effects a bailout will have on some groups. They only look at the jobs that will be saved and the multiplier effect that saving those jobs would have on the rest of the economy. They seldom try to determine what the negative effects would be. But there are always negative effects and those effects also have a multiplier.

2. DECLINES IN STOCKHOLDER WEALTH PROVE BAILOUTS DO NOT MEET UTILITARIANISM

Robert W. McGee, Director, Center for Accounting, Auditing and Tax Studies at Florida International University, November 20, 2008.

“An Ethical Analysis of Corporate Bailouts,” SSRN Working Paper, Accessed 12-11-2008, .

In other words, capitalizing the decline in stock prices leads to a $300 billion decline in shareholder wealth, even after the gains to the bailed out industry are taken into account. Thus, transferring funds from the more productive sector of the economy to a sector that has below average productivity results in a negative-sum game. In philosophical terms, the act does not meet the utilitarian ethics test and the act cannot be justified on ethical grounds.

3. UTILITARIANISM IS FLAWED BECAUSE THE EXACT COSTS OF BAILOUTS CAN’T BE ASSUMED

Robert W. McGee, Director, Center for Accounting, Auditing and Tax Studies at Florida International University, November 20, 2008.

“An Ethical Analysis of Corporate Bailouts,” SSRN Working Paper, Accessed 12-11-2008, .

Utilitarian ethics suffers from several inherent flaws. For one thing, it is not always possible to precisely measure gains and losses, which means that reasonable economists may differ in their conclusions about a particular case. The utilitarian analysis given above was based on reasonable estimates. One assumed that the average company in the average industry earned a 5 percent return and that a company in a distressed industry earned a 2 percent return. One assumed that price/earning ratios for the average industry are 15 and for the distressed industry are 5. That may be true sometimes but it is not true all the time.

4. BAILOUTS FAIL THE UTILITARIAN TEST BECAUSE LOSSES EXCEED GAINS

Robert W. McGee, Director, Center for Accounting, Auditing and Tax Studies at Florida International University, November 20, 2008.

“An Ethical Analysis of Corporate Bailouts,” SSRN Working Paper, Accessed 12-11-2008, .

Applying utilitarian ethics to bailouts leads us to conclude that bailing out industries in distress does not meet the utilitarian test because the losses exceed the gains. If that is the case, then why do governments continue to bail out distressed industries? Anyone who analyzes newspaper reports and television commentary knows the answer to that question. The people and groups who scream loudest are the ones who stand to lose if the industry is not bailed out. They are organized and do not hesitate to voice their opinions to their elected representatives, who are only too eager to help them out of their quandary in exchange for their votes.

Download 343.42 Kb.

Share with your friends: