What amounts to corporatism however is selectively nationalizing financial institutions to keep them from bearing their own losses, socializing those losses, but leaving all gains privatized. I

Ah. I wasn’t aware that you were using the word ‘corporatism’ in such a quixotic and odd way.

I find it is easier to talk to others if I stay to words actually mean.

Dan McIntosh,

Usually, corporatism involves a state partnership with the leaders of various economic sectors (a cartel, a union of unions, a profesional guild) to encourage “fair” economic development. Unfortunately, since some people are not represented by leaders as a sector (most notably, the unemployed), or underrepresented, those people tend to suffer disproportionally.

Indeed. The apparent success of Hong Kong under such a system hopefully can be a path to development for other authoritarian states. Still, Putin’s foolish belligerence and destruction of domestic political institutions would seem to make that unlikely for Russia.

Usually, corporatism involves a state partnership with the leaders of various economic sectors (a cartel, a union of unions, a profesional guild) to encourage “fair” economic development. Unfortunately, since some people are not represented by leaders as a sector (most notably, the unemployed), or underrepresented, those people tend to suffer disproportionally.

What amounts to corporatism however is selectively nationalizing financial institutions to keep them from bearing their own losses, socializing those losses, but leaving all gains privatized. In other words, the “connected few” get the profits, while the masses are stuck with the losses. Not exactly an equitable arrangement you would agree.

If you’re ok with this, I salute you. I’m not. I can’t bear to see this happen to a country that was once the envy of the world in terms of markets. It is now a laughing stock.

Now what would have happened if the Fed decided to intervene on day one of the bankruptcy filing? They could have done that, and provided the DIP loan to effectively take over the company at that point. Sitting as chief super-creditor and operator of the dead remains of AIG rather than chief super-equity holder of a dying, barely breathing AIG.

Indeed.

As a major poitn of the bailout was to protect the creditors, however, doing so would defeat the point.

More importantly, the risks to taxpayers would have been greatly reduced. All unsecured creditors would be trading junk right now (which is what they were and are trading anyway, its just not rated junk), all equityholders would be wiped out, and the Fed would be in a position to reap substantial profits after AIG’s bankruptcy was concluded and its balance sheet cleansed of the poisonous toxicity previously pulsing through its veins.

I’m not a socialist (that is, I don’t want to see the nationalization of industry in an attempt to increase the profitability of the government), so I would oppose such a move.

So then you agree that risks, when systemic at least, should be socialized, yet the gains leading to them should be privatized. This is, in sum and substance, a corporatist economic model. Let’s be clear about that. Is that correct?

As I understand the term, corporatism is a political system where special interests are reprsented in a legislative or consultative body. So that Italy historically, and Hong Kong now, are corporatist states.

I don’t understand how national health insurance, federal bond insurance, federal deposit insurance, amounts to corporatism.

Now what would have happened if the Fed decided to intervene on day one of the bankruptcy filing? They could have done that, and provided the DIP loan to effectively take over the company at that point. Sitting as chief super-creditor and operator of the dead remains of AIG rather than chief super-equity holder of a dying, barely breathing AIG.

More importantly, the risks to taxpayers would have been greatly reduced. All unsecured creditors would be trading junk right now (which is what they were and are trading anyway, its just not rated junk), all equityholders would be wiped out, and the Fed would be in a position to reap substantial profits after AIG’s bankruptcy was concluded and its balance sheet cleansed of the poisonous toxicity previously pulsing through its veins.

Would there be negative externalities to the aforementioned credit event? Why yes. Many banks, especially Wachovia, would have been pummeled for lending so much money out on so little collateral. The bonds would be worthless, or near worthless, and the bondholders would see their assets shrink overnight.

I do not think, however, that the fallout would have lasted long. Indeed, a DIP loan from the Federal govt. would be sufficient to keep the company operating as long as necessary in order to wind down its affairs in an orderly fashion. And moreover, we could finally have a debtor (the US Govt) in a position of strength over and beyond creditors and work out once and for all the true foundations of securitization, which are rotten to the core and would result in reverse capital flows from MBS owners to debtors in general. But I am seriously digressing.

So then you agree that risks, when systemic at least, should be socialized, yet the gains leading to them should be privatized. This is, in sum and substance, a corporatist economic model. Let’s be clear about that. Is that correct? You are advocating switching the US over from a capitalist based system whenever aggregate systemic risks are triggered to a corporatist based system where gains are given to the few, while losses shared by the many, are you not? And one follow up on this before I post, how do you decide which risks are going to be socialized? Is there some apriori definition of systemic you have in mind?

That’s fine, but you didn’t answer the question. In this instance, where the plan is being put forth that we retroactively socialize risks incurred by the TBF entities, you do not see any need to retroactively socialize the gains won by the TBF entities Is that right?

Of course not.

Morally, we should not punish legal activities.
Constitutionally, we cannot past ex-post facto laws.
Practically, we have better things to do.

Now, obviously there are bankruptcy courts, the costs of regulations, etc., but it sounds like you were thinking of something beyond that.

I know you want to talk social security and health care, and I’m happy to do that, but I’d like to nail this down first as it impacts my thinking going forward.

Take health care, for instance. Socialization of health insurance would not be to divert profits currently enjoyed by health care companies to the federal treasury. Rather, it would allow people to leave their jobs more easily, grow new companies more easily, and move around more easily.

The role of speculators within a system that is primarily intended to better invest capital and reduce risk is a complicated one. At best, speculators probe for weaknesses that would otherwise stay hidden and speed up the freeing of capital. At worst, they form an secretive herd. Thus the need for regulation of them.

So, it seems I did misunderstand you. Your proposal is then best reflected by this statement:

Socialization of risk is positive for economic development, but socialization of gain is not.

Any gains that are socialized are limited to those gains derived from the risk that was socialized, going forward from the date of socialization.

Is that correct?

Thanks for your thoughtful post.

My responses to your question:

(1) Do you agree that this “silver lining” is ex post (i.e., after the fact that the was risk was taken, which at the time was a private risk)?

Greater acceptance of socialization of risk follows after this week’s crisis, so “yes..”

(2) Do you agree that many gains were made for taking this risk initially?

Yes.

(3) Do you agree that such gains were privatized?

Yes, though of course there were positive externalities

(4) Do you agree that, in fact, what is being socialized is the rather large losses that many of the risk takers now find themselves with?

Yes, though of course the magnitude is presently unknown.

(5) Do you agree that normative considerations counsel for socializing gains alongside losses to make such losses (or risks if you prefer) more equitable?

I’m not sure what is meant here. A Federal Bond Insuracnce Corporation or Federal Money Market Insuracne Corporation has positive externalities, and so I imagine something like them will be created. That said, your phrasing sounds like an argument for social justice, which is a zero-sum approach to the economy that is both short-sided and counterproductive.

Given the choice between punishing someone for following the laws in a way I now dislike — or focusing on economic growth and the general welfare — I care little about the former, and a lot about the latter.

Where there is risk, there is reward. If the State takes on the risk, it takes on the prospective reward as well

Agreed. Even a ‘money-losing’ program like Social Security greatly expanded the capital cash on hand of the fedearl government for decades, allowing a lot to be done that otherwise could not have.

One danger in allowing the State to do this is that financial innovation (the process by which financial risk turns to profit) moves off shore or onto another Continent entirely. Leaving the State stuck in a rut of diminishing returns. Have you considered that possibility? How remote, or not, do you see such a possibility? Note: this isn’t meant to distract you from the above, simply to toss out some more food for thought.

This has definitely happened after SarbOx. There are bad regulations.

Corporations are naturalyl risk-averse. SarbOx creates a lot of new risks, and so chases companies away. However, the whole Credit Default Swap (bond insurance) industry existed to minimize risk. Some sort of FBIC/FMMIC would lower this risk, and so attract business.