By insulating the capital markets from risk, the federal government has rewarded the politically connected and placed taxpayers at risk by guaranteeing unsound financial bets.
Capitalism promotes cautious and prudent financial decision making due to the fact that investors risk their capital to invest in financially sound ideas. The fact that an investment can be lost provokes investors into performing due diligence and carefully scrutinizing investment opportunities. In this manner, capital is put to its best use investing in the businesses and industries providing those goods and services most in demand by consumers. Consumers benefit by having the goods and services most needed available in sufficient quantity to satisfy demand.
Being that no system is perfect, capitalism sees its share of losers among the winners as even the most calculated investment efforts sometimes miss the mark and investment capital is lost. In these cases, investment capital is lost due to the efforts of those investing their own private capital and they bear the brunt of these losses. Others learn from these mistakes and fine tune their efforts to avoid a similar fate while the capitalist system continues to thrive.
Lately it has become fashionable to have government protect investors from suffering losses due to investment miscalculations. Major industries such as automobile manufacture, the financial sector, and alternative energy have been subsidized by the financial guarantee of the federal government. It is argued that government intervention in these cases was necessary to prevent economic catastrophe or to encourage the rapid development of a needed industry.
In the case of automobile manufacture, the federal government bailed out both General Motors and Chrysler in 2009 ostensibly to prevent massive layoffs resulting from the bankruptcy of these two companies. However, reorganization under the bankruptcy laws does not necessarily mean closure of a company and the layoff of its employees. Bankruptcy of companies most often involves the reorganization of debt while the company continues to operate as a viable concern under the direction of a bankruptcy judge with workers remaining on the job. The excuse that these companies required a taxpayer bailout from the federal government to prevent layoffs is ludicrous.
Likewise with the financial sector, we were warned that a taxpayer bailout was required to prevent collapse of the entire financial sector. However, Lehman Brothers was allowed to fail while other politically connected financial firms were saved in a mysterious process known only to the administrators of the bailout funds. The only entities who actually stood to lose were investors in those troubled firms unable to meet the demands of their creditors. A process to allow the orderly unwinding of these complex financial transactions while still allowing the loss of speculative funds would have prevented a financial collapse while allowing speculative investors to lose their investments as the price of their risk.
Solar and wind power companies were granted massive taxpayer loans even as they were failing in order to protect politically connected investors. Despite the billions of dollars pumped into the alternative energy sector, traditional fossil fuels such as coal, oil, and natural gas continue to provide our only sources of cheap reliable energy. The ability to exploit massive shale gas deposits through revolutionary hydraulic fracturing technology has reinvigorated America’s energy sector bringing down the cost of natural gas and leading to American energy independence. Environmentalists who once championed natural gas as a cleaner alternative fuel now attack it for threatening the viability of their cherished wind and solar alternatives.
In each of these cases, had capitalism been allowed to operate freely and unfettered by government intervention, entrepreneurs would have developed the technology and found the ways to put limited capital to its best use for the good of all Americans at the lowest cost. Profligate waste by the management of GM and Chrysler would have been eliminated by investors seeking to maximize their investment with the installation of more competent management teams. Risky investments at financial firms would have been properly analyzed and eliminated due to their limited ability to generate the rewards necessary for their undertaking. And, development of wind and solar technologies would have continued on a slower pace to fill the niche markets most suited to their abilities without forcing them into mainstream markets for which they were not yet fully developed. Taxpayers would have been spared the expense of protecting wasteful capital spending private markets were unwilling to subsidize.
By declaring that some institutions were too big to fail, government sent a clear message to business that firms should become even larger in the hopes of giving off the impression that their ruin would lead to financial collapse. Also, the message that financial loss would not be tolerated thus encouraging ever riskier behavior was telegraphed clearly to the markets. Thus, the natural restraints to capitalism arising from the possibility of financial loss have been removed from the system with the effect that taxpayers will be responsible for protecting a system that is no longer encouraged to protect itself.
On an individual basis, if one was handed a credit card with no limit and the promise that they would never see a bill, would one naturally restrain one’s spending? Of course not, for there would be no restraint built into the system. By placing the guarantee of the federal government behind markets to prevent losses, the natural restraints of capitalism are removed and a financial bubble is encouraged to grow. Our experience with financial bubbles shows that they eventually burst with a great deal of pain parceled out to the entire economy. This time will be no different except this bubble will be larger than any that has come before, meaning that the pain resulting from its eventual bursting will be even greater.
Those who decry capitalism and suggest we dump it in favor of a centralized government controlled system are pointing to problems in a capitalist system severely handicapped by massive government intervention. What passes for capitalism in America is nowhere near the free and unfettered system envisioned by our Founders. Conservatives must take pains to point this out when capitalism is attacked by radical secular progressives pushing for government control of our economy. The removal of risk from the capitalist system through massive government intervention is a perversion of capitalism that distorts its ability to effectively utilize capital in its most efficient and productive capacity.