Who should be bailed out?

“Stand on your own two feet” has died on its arse. That’s the message of reports that the US Treasury plans to spend tax-payers’ money - I’ve seen one guess of $800bn - to buy banks’ mortgage derivatives. It looks a little like the Resolution Trust Corporation on a bigger scale*.
Ignore the moral hazard here - almost everyone else has. The interesting thing here is the political aspect.  If tax-payers should help protect the rich (or once-rich) from suffering from problems of their own making, isn’t there a more pressing requirement - in justice at least - to protect the poor from suffering as a result of forces beyond their control.
And these forces are large. Half, or maybe more, of inequality in lifetime earnings is determined by the age of 18 - by genetic endowments and schooling. These causes of relative poverty are far more beyond the control of the poor than banks' losses are beyond the control of the rich.
So, if it’s a legitimate, just, use of tax-payers money to support banks, it must be even more just to use it to eliminate at least half of inequality.
Yes, justice has many meanings. But I doubt if there’s one of them which says a banking bail-out is a juster use of tax-payers money than relieving inequalities arising from forces beyond an individual’s control.
I know, I know. I’m missing the point. This bail-out has nothing all to do with justice, but is (arguably) necessary to ensure economic stability.
But this only reminds us of some important facts. A capitalist economy is very different from a free market. Capitalism has nothing to do with justice. And if you want the state to help you out, you must appeal not to rulers’ sense of justice, but to their fear. 
 * I went to the US Treasury site in the hope of finding out more about this, and the first thing I saw was “Treasury Launches Multi-Media Campaign to Teach Young Adults About Credit”. Can I take it they’ve given up hope for older adults?

Comments

[Luis Enrique]

"tax-payers ... protect the rich (or once-rich) from suffering from problems of their own making"

Do you think that's what's going on? Do you really think this is being done to keep rich people in their jobs? I'd have thought that was a side-effect of keeping the financial system afloat, and the aim is avoiding the collateral damage the collapse of the system would cause. I don't think the Fed gives a crap about rich trader and bankers losing their jobs.

I think it's regrettable if the received 'truth' about what's going on becomes "bailing out rich people"

[Will]

Luis, ask yourself why the financial system needs or deserves to be kept afloat. The fabulous self-regulating market we hear so much about is not broken by the collapse of individual traders - indeed, such collapses are a necessary component of the system itself: sometimes firms have to go to the wall so that they can be replaced by something better.

Or at least, so we're usually told by the same people now begging for special treatment. I don't remember them having much sympathy when it was miners' and car workers' jobs on the chopping block.

The collateral damage to everyone else has already been done by rising prices and the withdrawal of the credit terms on which the 1990s boom was built. Those days are not going to come back because the government pours good money after bad.

[Richard Hancock]

"the US Treasury plans to spend tax-payers’ money - I’ve seen one guess of $800bn - to buy banks’ mortgage derivatives"

Is it likely to be an intelligently designed package?

[Luis Enrique]

Will,

If I thought the situation was remotely comparable to car workers being laid off because robots are now making cars, I'd be more than happy to see the banks go to the wall. Yes, sometimes firms have to die to be replaced by something better, and I hope these banks will be replaced by something better, because they make too much money for what they do.

Anybody who has been paying attention to economics for ooh the last 4 decades knows that wonderful self-regulating markets aren't so wonderful in the presence of various market failures, and under the right conditions can completely implode. If the car manufacturing industry looked like going under, not because nobody wanted to buy cars any more, but because of some sort of market failure whereby perfectly good businesses were going to get wiped out, I'd be asking the state to step in there too. This isn't just about the banks having taken some dumb bets and lost, this is a titanic market failure.

The only reason the finance system needs keeping afloat is because if it goes, businesses will find themselves with loans called in, and be unable to raise capital .. and we could enter a depression. I don't care about the bankers (well, beyond the usual sympathy for anybody losing their job) I am purely worried about the knock on effects. You ask me to think about why the financial sector needs to be kept afloat - I get the impression you haven't really thought about what happens if it isn't.

[Vinod Joseph]

The reason all this (using tax payers money to clean up the mess made by the rich) is happening in a capitalist democracy is because the poor aspire to be rich very soon. So, they don’t mind the rich being given unfair deals, because they hope to get such deals for themselves pretty soon. www.winnowed.blogspot.com

[passer by]

Nope this is wrong headed.

Capitalism is not just property rights (ownership) but what you can and cannot do with those property rights (risk taking )

So boffins come up with a system (computer model and resulting contracts) that was an illusion built on a timeless error that Mathematics is a science (Marx anyone?) and thus the future could be predicted, and then the supposed capitalists could invest away without or with reduced risk which they happily did, under the this gigantic illusion.

All the experimentation shows when people feel safe they take more and more risks, capitalism is not about safety (moral hazard) its a rational self sustaing creative and destruction process, believing you can know the future is irrational.

Capitalists are not not being bailed out, fools are.

[BenP]

Marx indeed.

"On the other hand, the whole process becomes so complicated, partly by simply manipulating bills of exchange...that the semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense partly of swindled money-lenders and partly of swindled producers."

"Business is always thoroughly sound and the campaign in full swing, until suddenly the debacle takes place."

[Laban]

Along with the moaral hazard argument (I can see no reason why the institutions shouldn't do the same thing all over again in a decade or two) there's the question of size.

Governments have intervened because the institutions involved are 'too big to go bust' - they'll take everyone with them. And the government answer is to merge them into even bigger entities.They should be breaking them up.

[Charlieman]

Yes, CD, I get the argument about finding money and addressing inequality. And I love “Stand on your own two feet” argument.

The problem with the latter argument is "where we are now". Banks have provided loans on poorly secured assets, systemically. I'm not an economist, but my recollection of previous financial crashes is that they were caused by inaccurate currency, metal and industrial speculation. This is a new sort of crash: bad loans to ordinary people.

Never before have so many people sought a mortgage. Seeking a mortgage is a good action if you wish to settle in your own home; it is not good if that is the only way to find somewhere decent to live. But I'm with the Tim Worstall argument on this: generous loan policy has permitted low income people to buy their home.

Again my knowledge fails me. If there is a failure in the housing market, why can't I get a loan for my hypothetical business? The risks are different and I deserve a cheap loan, surely?

Has destruction of building societies made a difference?

[reason]

Why are interested in preserving the stability of an unfair system? Surely, eventually we have to pull it down and start again, why isn't now a good time to do it? Shouldn't we just bankrupt the firms and spread the 700 billion evenly through the population, a velvet revolution. Do we really prefer another Paris or St Petersburg?

Vinod Joseph - popular delusions are not a good basis for policy.

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