Casino Capitalism

by Don Boudreaux on July 23, 2008

in Current Affairs, Politics, Regulation

The Cato Institute‘s Gerry O’Driscoll wisely warns against bailing out Fannie Mae and Freddie Mac.  Here are some choice paragraphs:

Absent from [Treasury Secretary Henry] Paulson’s plan is any protection for taxpayers. They’ll
fund the downside if losses mount at the two mortgage giants. But if
Fannie and Freddie recover, stockholders and management gain. Call it
"casino capitalism" – taxpayers bankrolling management high rollers.

The plan doesn’t ask stockholders or management to suffer for their
financial indiscretions. The players who put their companies in
jeopardy get to stay in charge – Paulson says he isn’t looking for
"scapegoats." Someone should remind him that capitalism without failure
is like religion without sin.

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Martin Brock July 23, 2008 at 10:08 am

Absolutely. Now, there's a real libertarian.

I'll add that real capitalism is always "casino capitalism" and well it should be. This bailout is State Capitalism. It's a state taking the casino (the entreprenurial risk) out of a capital market. It's the socialization of risk and the privatization of profit, i.e. it's Fascism.

So why can't Fannie or Freddie simply declare bankruptcy and sell its assets at a loss to other financial service providers who'll offer investors lower yields on their bonds? All I hear from statesmen are vague prognostications of doom rationalizing their preferred bailout of the nominal "capitalists" and the quasi-state employees managing these companies.

Sam Grove July 23, 2008 at 10:40 am

And failure requires competition, that someone else might succeed.

Methinks July 23, 2008 at 11:46 am

Well, Martin, if we let Fannie and Freddie fail, the whole financial system will simply collapse and the U.S. will suddenly turn into a bad Kevin Costner flick. There's just so much scary "systemic risk", what with regional banks holding so much Freddie and Fannie as reserves, etc. etc. The dollar will be clobbered if they are allowed to fail as foreign investors flee upon realizing the U.S. government won't make good on it's promise to rob taxpayers at gunpoint on their behalf. Of course, all the money we're going to print to pay for the bailout is NOT going to tank the dollar! No siree. Normally, it would. But this time, MAGICALLY, it won't. Or at least the trade-off for laying waste to American taxpayers' savings (while complaining that nobody is saving) is not nearly as bad as allowing foreign investors in Freddie and Fannie take a hit to their portfolios by actually bearing the risk of their own investment. If you were a Friend of Angelo Mozilo, you'd understand how unfair it is to deny the CEOs of Freddie and Fannie their $15 million annual paycheck for figuring out how to maximize returns for their shareholders by shifting the risk to taxpayers and passing very little of the subsidy to home buyers. No. No. If you were a good friend, really cared about "systemic risk", and were possessed of the correct motives, you would be going after evil speculators driving down stocks in the stock market and driving up oil in the oil futures market.

OK. I have to stop. The sarcasm is literally eating my brain now.

Tim July 23, 2008 at 11:46 am

Seems to me this "casino capitalism" is similar to what happened in 1980 when Congress gave us the Depository Institution Deregulation and Monetary Control Act (DIDMCA) while raising deposit insurance to $100,000 per account (which I believe was above the account balance of over 90% of U.S. depositors).

Essentially, the combination of Deregulation and increased depositor insurance told the flaggin S&L industry to take the keys to the casino and try to save themselves with junk bonds. With their depositors losses covered and firms that were already losing money by buckets, they were given the OK to take on high-risk investments.

If they "won" and saved the institution, they were heroes. If they lost – well the depositors were covered and you can't get blood from a stone.

Martin Brock July 23, 2008 at 4:04 pm

Latter day "capitalism" goes something like this. I put a dollar in a vending machine today, and when I return a year later, the machine returns $1.05; otherwise, statesmen protect my "rights" by collecting my $1.05 from random passersby at gunpoint. What happens in the meantime isn't really my problem. That's what the government is for.

Of course, that's not free market capitalism at all, but we're so far down this road now that it's hard to imagine the real thing anymore.

vidyohs July 24, 2008 at 7:31 am

I can remember the time when lending institutions did often lend to people who had no potential for repayment, that time was up to the late 60s. Also, commerce avoided building and opening outlets in certain areas because of the increased potential of crime in burglarization of the facilities themselve and theft and abuse to poteltial customers.

Then we had the great equalization movement of the late 60s and early 70s, and government responded to special interests groups and put real hard pressure on lenders to not only loan to risky people but to build and operate outlets in high crime districts. Government did the same with retail businesses as well as Real Estate brokers.

No discrimination in lending practices is tolerated.

And lo! It happened across the land.

To this countryboy I can only see it happening if there were backroom deals made so that when the lending institutions, retail outlets, and real estate brokers suffered the inevitable losses government would step in and bail them out……but the upfront equality would be maintained regardless of the cost to the taxpayer of the backend loss.

What I see now is simply the results of the deals made decades ago, and of course the government has to bail out Fannie Mae and Freddie Mac, the government was the force that created the inevitability of the collapse.

Banks were making risky loans and exposing themselves to loss, now whoda thunk a wise banker would do such a thing without a safety net spread wide beneath him?

webstigma July 27, 2008 at 5:56 am

Mccain does not know the east cost from the west cost

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