Privatizing Profits and Socializing Losses

This phrase has become all-to-familiar post-financial crisis with bankers receiving government bailouts and allowed to continue their abhorrent bonus structures and other practices unchecked.

But, if you think about it, this problem is pervasive in our modern economy, even absent government intervention.

Textbook economics assumes perfect competition.  Students are often told, "well, nothing is ever truly perfectly competitive, but capitalism tends towards that."  It's often stated as a truism, even though evidence suggests that our real-life capitalism whether due to some combination of economics of scale, cronyism, information and power asymmetries, etc actually tends toward oligopoly.  Oligopolies have some significant degree of price manipulating power and can actually take losses for years and still not be forced to exit a market.  In oligopolistic economies, price is usually not the factor that businesses in an industry compete on.   Rather, they usually compete over product differentiation and advertising in general.   (A nice example here)

The point is, if an industry or even just an individual firm in that industry is hit by a significant loss (negative profit, say due to a financial crisis, or whatever), oligopolistic firms need not cut their prices in the face of low demand - they can simply cheapen their product, or tack on hidden fees, etc (all the while marketing the fact that their products are new and improved and inexpensive).   The result is that the losses that should at least partially be born by the industry, are actually largely passed on to the masses (the consumers) who are duped (via asymmetric information).  IE, losses are socialized. In the opposite case, due to their market power inherent in their structure, during 'good times', oligopolies can reap huge private profits.

A more obvious way in which losses are socialized is that poor decisions (and by poor, I mean fraudulent in most cases) by the institutional management in a firm creates costs, but those costs are often passed on not via punishments to the bad decision maker but to the employees in the form of pink slips.  Employment in financial and insurance services has fallen 7% from its peak in 2006 - about 400,000 employees.

Bernanke: Misguided, Egomaniac or Weakling?

He's definitely got to be one of the three.  

Bernanke the misguided:
Maybe he truly believes the words that come out of his mouth in these hearing - that the Fed is 'ready to act' as if it has anything it can do at all.   What we've learned is that interest rates matter very little in these kinds of deep financial recessions, and even if they did, the Fed has already pushed even certain mid/long-term rates to record lows.   Is it possible that Bernanke wants to believe that he can help and truly is just misguided.  Perhaps, but I think the probability that he could be duped this easily is low.

Bernanke with the big ego:
Maybe he's fully aware that the Fed's actions are likely to do little to stimulate the economy but he wants to come off to Congress and the American people as someone with a lot of power.  He wants to continue living in a fantasy where everyone hangs on the Fed chair's every word as if at this point it really means anything.   I don't know the man personally, but again, I have a hard time seeing Bernanke being Mankiw-like in this way.

Bernanke the weakling:
At this stage in the history of economic policy, Bernanke has had opportunities to really take it congress, to really express what I must imagine is his and certainly the average Joe's frustration with the deadlock, vitriol, and general dysfunction that defines our legislative branch.   He could talk about how the fiscal dangers are not of 'running out of money' but of failure of the public sector to invest in our future or to help the private sector rebound - leaving employment and with it tax revenues fairly stagnant.  But instead he talks in low tones about 'fiscal cliffs' - he suggests no innovative legislative actions beyond maintaining the status quo (not letting tax cuts expire, and not reducing government-driven demand beyond current levels).  In other words, Bernanke the weakling knows the only potential solution, if there is one, lies with the legislative and executive branches, but he is too scared to push the point.   This sounds like an academic economist - someone who is good at numbers but not good at message.   Could this be the real Bernanke legacy?

Bernanke's response:

I've been assigned to focus on maximum employment and price stability, not to hold threats over Congress’ head. Congress is in charge here, not the Federal Reserve.

I don't know if it's his 'job', but it seems like the right thing to do for the country.

Our Legal System Supports our Crony Capitalism

What's wrong with this picture:

One the one hand we have individual citizens who steal things or money from other individual citizens.   Laws vary from state to state, but here in Indiana for example, theft can get you anywhere between 6 months to 8 years in prison depending on what was stolen and how much of it was stolen etc.   The average American will earn about $1.6 million over their lifetime, and so an individual thief may essentially lose up to 10% of their total lifetime earnings due to loss of income in jail (assuming the average person lives to be about 78 years old).

Now take not a person, but a large bank.   A bank that has  'stolen' millions of dollars through fraudulent and just outright deceitful practices.  This action just isn't one theft like someone stealing a painting or a car: it literally ruins entire families: hundreds or thousands of families across the nation.  Yet, this bank, because of the power granted to them in our supposedly capitalist system, means they get a slap on the wrist of $175M.  A bank like Wells Fargo has aprox. $80 Billion in gross income in one year.  Therefore, Wells Fargo's slap on the wrist equates to about 0.2% of it's annual income.  But wait, that not a good comparison to what Wells Fargo can earn and finance over its life.   If we assumed Wells Fargo's 'life' was 78 years (just like a typical American), Wells Fargo's lifetime earnings would be over $6 Trillion, which makes $175M look like toilet paper.  And Wells can earn exactly the same amount of money at age 78 as at age 20, because unlike individual people, banks never age and never have to worry about things like  healthcare, social security, etc.

Let's recap.  One person loses years of their livelihood and a signification chunk of lifetime earnings and all the family support that could have been provided during that time, all for stealing something as mundane as a car.

One bank, loses less than 1/5 of 1% of it's annual earnings for destroying hundreds or thousands of families across the nation.

Think about that.

Mike Norman on the Fed's Uselessness

I agree.

Hat tip to Mike Valotta.