Earlier this summer, the federal government bailed out investment bank Bear Sterns. Then, after mortgage brokers Freddie Mac and Fannie Mae went under, the government stepped in to bail them out too. Supposedly, the bailouts stopped there (and the government did let Lehman Brothers fail without stepping in), but when AIG needed help, the federal government stepped in yet again. All told, these four bailouts will cost the American people over 130 billion dollars, and that is a pretty conservative estimate. (UPDATE: Yeah, pretty conservative. The actual cost will probably be closer to one trillion).
Neither presidential candidate could find it within themselves to condemn these bailouts, and it’s not hard to see why. (Although Sarah Palin did imply that bailing out AIG might not be a good idea). The last thing voters want is a candidate who seems to be standing in the way of government help. Or maybe not—a recent Rasmussen poll found that only 7% of the nation favors bailouts for investment firms—and 65% don’t. (The rest were undecided). But the candidates aren’t taking any chances—they fully support any and all government bailouts.
They shouldn’t, because the recent bailouts were dreadful ideas. Granted, simply letting these investment and insurance giants fail would have had disastrous consequences—many would have lost a great deal of their savings, and others, in the case of the mortgage brokers, would lose their homes.
But the consequences of the bailouts could very well be worse. First, and most obviously, the bailouts mean spending money that we don’t have. The federal budget ran a half trillion dollar deficit in 2008, and it’s obvious that we can’t afford to spend another hundred billion paying for private company’s failures. Washington can save companies like AIG from bankruptcy—but when the government can’t pay its debts, who will it turn to?
Apart from the careless stewardship of our money (and really, does anyone expect any less from Washington?), the government bailouts represent a frightening sort of socialism. The United States government is now probably the biggest insurer on the planet—and that can’t be right.
Capitalism is built around the freedom to succeed—and conversely, the freedom to fail. When starting a business—or investing in one, or, say, getting insurance or a mortgage from one—the individual is allowed to keep what he earns from his deal—but is also responsible for his or her losses. They are not the government’s responsibility.
Yes, had Freddie Mac and Fannie Mae failed, people would have been hurt. But welcome to capitalism—when those people invested in these companies, they took the risk that these companies would fail. Some perfectly innocent people would have lost everything (or nearly everything, this isn’t the Great Depression here) had any of these companies failed, and it’s not fair, but it is an integral part of capitalism.
Capitalism is distinguished by booms and busts (as opposed to socialism, which is just one long decline). There would be trouble and turmoil and difficulty had the bailouts not happened, but that is just part of the cycle. The fiscal situation would eventually change, and the economy would become stronger than ever.
Those conservatives (and there are many) who support the bailouts argue that we must structure the bailouts in such a way as to ensure that they are never necessary again. Right. No expansion of government is ever temporary. Maybe Freddie Mac and AIG and the rest of the bunch will learn their lesson and never need help again—but some company will, and when it does, the federal government will come running. These bailouts send a dangerous message: “don’t be afraid to fail; the government will bail you out.”