As the economy continues to deteriorate in the face of largest infusion of money from the Federal Reserve seen in modern times, populist rage and confusion over these developments spreads across the country. Pundits and politicians alike fan the flames by making examples out of firms like AIG which recently used some of the bailout money for employee bonuses ($218,000,000), all without addressing the important issues at hand. In this particular episode, common sense would dictate that if the taxpayer is giving funds to a company, we have the right to not only know what they are using the funds for (they actually did report that they were going to give these bonuses three months ago) but we also have the right to include some rules over the use of this money. After all, how can we trust the judgment of this company or these companies that got us into this mess to begin with?

So who do we blame? Do we blame the AIG executives’ judgment? Do we blame the Bush administration for giving them the money without preconditions? Do we blame the Obama administration for continuing the policy of paying them to stay afloat without preconditions? Do we believe the Obama administration when they say that they found out last minute? I believe that the blame lies with all parties involved… but at the end of the day, the AIG bonuses brouhaha is nothing more than a distraction from the fundamental issue at hand: what should the relationship of the federal government to the free market economy be? How do we balance free enterprise and government intervention?

A failure of the system is the fact that the federal government believed it was necessary to bail out certain companies that were/are deemed “too big to fail.” The mere idea “too big to fail” is somewhat antithetical to capitalism in that the property of a large number of participants in the economy can be threatened by the actions of one entity, running contrary to the spirit of competition and free enterprise inherent in capitalism. Of course, economists, public figures, and journalists have all but written off the idea that letting them fail is acceptable and have all conspired to create this untenable situation where the taxpayer must spend trillions upon trillions of dollars in order to save some of the most wealthy corporations in the world. We have entered into the world of corporate socialism… and the solution presented to us is more corporate socialism. Some even advocate total nationalization of the financial sector and government regulation of the economy, i.e. classical socialism. But just as in the natural world, in free market capitalism organisms are born, live, and die. In the case of corporations, those that fail must die in order to continue the cycle… otherwise, the public will be left keeping a failed corporation on life support… the very situation we experience today. What this has created is a bailout plan that resembles a machine gun starting with Bush and painfully accelerated by Obama and most of that taxpayer money has been sunk into failing companies.

While it may be too late to let these companies fail, it is not too late to re-examine the government’s relationship to business. Right now, the calls for more and more government intervention have become deafening. This approach is to simplistic. Government was part of the problem: pushing Fannie Mae and Freddy Mac to loosen credit requirements in the late nineties to today (increasingly issuing subprime loans), the federal government policy of guaranteeing either fully or partially against homeowner defaults on mortgages (reducing the moral hazard of issuing higher risk loans), and the Federal Reserve raising the interest rates during a time when adjustable rate mortgages were a significant proportion of existing mortgages (contributing to defaults of mortgages that started the major decline, rates started coming down as soon as the recession worsened considerably). Government action was complicit in the crisis. On the other hand, government inaction in regulating the securitization of mortgages was also a major factor. So the simple answer of more regulation, something that the government itself supports (more power in the federal government), is not the answer to the problem. But then again, government actions in general have been counter-intuitive: to give more and more money to the companies that were part of causing the recession and asking for more money from the taxpayer.

In our economy that values consumption rather than production and has created a system based on “paying later,” what the government is doing is a continuation of the same old policy: borrow and spend now, worry about paying later. In this case, they are “borrowing” from the U.S. taxpayer, present and future, without a clear direction or plan out of this situation. The administration passed a $787 billion stimulus package without an explicit plan of how we can fix the economy. The Federal Reserve just printed $1.2 trillion dollars to prop up the economy a few days ago (all during the AIG debacle, many people missed this news) and the value of the dollar tumbled against all the major currencies, betting that a bit of inflation can bring us out of this and hoping that we can control inflation later (which we probably can). The administration is also expected to ask for another stimulus after this one is underway. What is not being addressed is the fact that these companies were able to affect our economy so substantially. The governments role should not be to spend taxpayer money to save big business nor to spend taxpayer money to pay themselves more or regulate more, it should be to regulate the those parts of the market that are essential for the existence of our free enterprise system and protects the average citizen. Furthermore, the government must make sure that there are no companies that are “too big to fail” in the first place. If we continue to surrender power to the state, they will continue to make business/market decisions based on their social policies, such as pushing for subprime loans to “help” lower income families and then jacking up interest rates a few years later. Or worse, we may end up losing our rights for private property, rights to privacy, and free enterprise system which will have ramifications in abortion issues, first amendment rights, second amendment rights, internet privacy/security, etc. The long term question is simple: do we want economic freedom or government planning? If that choice is economic freedom, we must remain vigilant and make sure that we watch what we need to watch, be careful in enforcing social policy on the markets, and not allow companies to become too big to fail. A company that is too big to fail is synonymous to an individual possessing a nuclear weapon; while the company/nuke-man has the right to free enterprise/right to bear arms, there must be reasonable limitations based on collective well-being/safety… and both should be illegal. Inversely, if that choice is government planning, then the taxpayers must prepare to keep handing over its money to the state and the state oligopolies that control our fate. In that case, God help us all.

-AG