The Failout

Anyone who has paid any attention to anything over his or her lifetime will no doubt recognize the fact that anything the government touches ends up being wrapped in so much red tape that it resembles a poorly wrapped gift that is so hard to unwrap that you end up breaking it before you get inside. Many have been rubbing their hand in glee at the recent financial crisis, claiming that is a deathblow for the Free Market, but when you look at the details of the events in the financial market in the run up to the crisis you will see the fingerprints of government all over the place.

To be fair to the government, they are trying to fix the fuck up they’ve created, although they’re doing it with borrowed money, so government debt has gone sky high, debt that the taxpayer will only have to pay off later.

But the purpose of today’s blog is not to have another go at the financial mess; instead I want to turn to another plea for government intervention coming from the States. The so-called ‘Big Three’ carmakers in America: Ford, GM and Chrysler, lobbied congress for over $25 billion of bailout money. This bailout won’t work, it is against the principle of the Free Market and is typical of the governments we have both in America and Britain. Fortunately the bailout has not yet been accepted by congress.

The sign of a strong company is not that I can be profitable in good times, but that it can survive through bad times. If Ford, GM and Chrysler cannot remain economically viable in the current climate, they should not be propped up by a government that claims to be in support of the Free Market. Pumping unconditional funding into companies that are no longer viable gives then no incentive to become viable; if the ‘Big Three’ know they can rely on government bailouts, they will not make as much of an effort to become more efficient. The Bailout may keep these companies in business for a few more months, but it will only delay the inevitable failure of these companies. To say that they should be allowed to fail would be to imply that we have a choice in the matter, we don’t. Unless Ford, GM and Chrysler make an effort to change their business structure to one that will be profitable they cannot survive, any attempt to change that is ultimately doomed to failure.

The reason that they are not able to compete with the Asian based companies like Honda and Toyota is that that are making inferior products. If they made cars better than their rivals, they would be fine because people buy the best that is on offer at the price that they are willing to pay. The basic principle of the free market is that companies succeed or fail depending on the quality of the product produced. To distort this by pumping money into inferior companies is to fly in the face of all the rules of the Free Market. Indeed any government intervention is anti-Free Market.

But why does the government do it? Isn’t the free market a good thing? Many would say that it isn’t, but I disagree. The worlds past adventures into the deep dark realms of Socialism should be more than enough evidence to prove that it doesn’t work. The government intervenes in the Free Market because it thinks its job is to cater for the needs of its citizens. This implies that need is a qualification for rights. It isn’t. The government is constantly providing its citizens with something they don’t deserve; why does anyone have a right to anything they haven’t worked for?

Had the US Government given this bailout to the ‘Big Three’ it would have been protecting the employees of the companies. But protecting them from what? Unemployment? Well yes, but this implies that the employees of the ‘Big Three’ have a right to a job. They don’t, they only have a right to get a job. The reason the bailout fell through was not a sudden realisation that it would be immoral, but the fact that there are plenty of other companies making cars in America who would quickly scoop up the former employees of the ‘Big Three’. Those companies are economically viable; they can replace the ‘Big Three’ very easily and no doubt will.

I think ‘Big Three’ will come crawling back to the government to beg for more money. Let us hope, in the name of the Free Market, that the government sends them packing again.

the belated economic mess...

Well this was meant to happen last week, but it didn’t as I explained in my last entry. It may be a week late, but to be honest it doesn’t matter; the situation has not exactly changed! Anyway, enjoy.

Unless you have been living under a rock for the last year or so you will know that the world economy is not doing so well at the moment, in fact it would probably not be a bad description to say that the economy’s tits are moving firmly in the skyward direction (i.e ‘tits up’ for all the slow ones). It may have also come to your attention last week that the Americans were trying and failing to pass a bill to help bail out the failing banks on Wall’s Street. Fortunately congress came to their senses and passed the bill at the end of the week, although it doesn’t seem to have helped because the world economy is still in freefall.

You have probably guessed that I am for the bail out. The reasons for this are not as clear as one might think, I do not, in principle agree with government control over the economy; because in my experience no government can organise a piss up in a brewery, and if they can the end result is normally an awful lot of corruption. I am in favour of governments stepping in this time because it is a mess that they have created and so they have a moral obligation to try and fix what they have broken.

My limited understanding of the economy tells me that, if the government is going to tell a bank that it is ‘too big to fail’ (in essence giving it a blank cheque), it has to regulate the bank to stop them from taking to many risks. After all it is not the bank taking on the risk; it is the government. In this case the government is giving the ‘blank cheque’ to the banks, but not regulating them enough.

In my opinion giving the banks a black cheque cannot be a good thing; it can result in one of two things, one the situation we land ourselves up in now, which is a load of failing banks who have taken on too much risk and now are relying on the government to help them out when the going gets tough and those risks do not pay off. Or we end up with over-regulated banks that are, in effect, nationalised and, because the government is so incompetent, they will inevitably be poorly run and overly bureaucratic.

The alternative is no ‘blank cheque’ and therefore a high risk that if one big bank fails the entire economy will fall flat on its face. Apparently. Although this line of reasoning seems to ignore the fact that other banks will suffer greatly if one bank collapses and confidence is shattered, so they will try to support a failing bank in order to save their own skins. The government simply does not trust the banks enough to act in their own interests and keep the economy as strong as possible. Maybe it’s time the government realise that the economy will actually regulate itself in order to keep itself strong, everyone gains from a strong economy so it is in his or her interests to keep it strong. Government intervention just distorts the issue by not allowing the economy the freedom to self-regulate.

Another interesting little titbit however is that many of the banks should not even be in any trouble at all. House prices will naturally rise faster than other goods prices (in line with earnings), so they are a very secure investment in the long run. House prices may take a short term hit, but they will recover, so it makes sense to keep money in housing, which is why it is odd that so many banks and building societies that deal mainly with property should be failing. This can be attributed to a change in the way in which banks assets were valued a few years ago. This new way in effect undervalues assets by focusing too much on short-term prospects rather than the long-term value of an asset, which in the case of property is very secure.

This obsession with short-term gains is damaging, not just to the economy, but also to society. Our consumerist society is obsessed with short-term gains and does not plan for the long run enough. Obviously we should not concentrate on long-term issues so much that we loose sight of the here and know, but we surely must be rather more long-sighted than we currently are.

So once again, while also planting considerable blame on the government and some on the economy, I have to conclude that human nature and human stupidity is the greatest danger facing our society. If only we could all smarten up realise that the long-term is just as important as the short-term, then I’m pretty sure that the world would be a more secure and well off place. But I suspect that we’ll be seeing whole squadrons of pigs to aerobatics before that happens.