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Economic Matters: Socializing the Risk or Capitalizing the Reward?

Written by geoff holsclaw : September 25, 2008

I for one support the goals and views of Jesus Manifesto wholeheartedly.  But I tend to read these goals through economics (rather than through the issues of pacifism or none voting which deal with war and democracy directly).  I guess in one sense I have made a (but not THE) post-political turn such that everything truly political happens in the realm of the economic.  Perhaps many will think this is a tired Marxist refrain, but I just mean that the most important issues politically are controlled economically.

But let’s turn to the issues at hand: the proposed economic bailout for the economy (see here for update and here for history).

First off, here is a draft of a letter that I sent to my Illinois Senators and Congressman (Obama, Durbin, and Kirk…(If you would also Iike to write a letter to you Senators, go to this SoJo campaign).  I offer it as both an example that while I criticize voting and federal politics, I also advocate a strong ecclesial existence, this does not mean that I merely abstain from political action.  But also it is an example of political economy.

Senator Obama,

As a person of faith and pastor of a local Christian church, I ask that you would act quickly in opposition to the administration’s proposed bailout plan, and instead support a more responsible and regulated plan (such as that advanced by Senator Sanders).

We cannot socialize the risk and capitalize the reward of these financial institutions, allowing average taxpayers to carry the burden of the bailout without them also reaping the benefits when the crisis has been averted.

By any account, the financial events of the last week have been historic and will continue to be, rivaling that of the Great Depression, and perhaps even your own historic bid for the White House.  And while haste is necessary to stave off a financial meltdown, this cannot come at the cost of expanded Administrative power.

That phrase “socialize the risk and capitalize the reward” I got from Steve Long, my professor and adviser at Marquette University.  This in effect is what the Bush administration is proposing when it seek a $700 billion bailout check given to the Treasury.  This would be an open line of credit that the Treasury would use to bolster these ailing financial institutions, because if they should fail then the lines of credit which keep the economy greased would dry up.  Credit is like the oil in your car.  If it runs out then the engine explodes.  Therefore, for the administration, we need to socialize the risk through a taxpayer bailout because the risk of the whole engine blowing up is too great.  But once the risk is avoided, then these institutions should be able to go on as before, i.e. capitalize the reward.

Now, Obama and McCain both feel this is irresponsible (good thing).  The right thing to do in this instance would be to socialize the risk and socialize the reward by allowing taxpayers to benefit when these stocks rebound (as they did in Sweden) by have the government take over a controlling share in these firms as part of the bailout.  But the problem for Republicans is that this sound too much like a State owned institution.  And it sounds like this because it is this.  But Bush cannot allow this because this would invalidate his Free Market stance.  He want his Capitalist cake cut up by a Socialist knife.  Of course the really scary thing is that Bush’s proposal, in the form of $700 billion, would express the largest shift of power from the legislative to the administrative branch ever.  Why?  Because running the economy in the most politically powerful thing one could, even more powerful, I would argue, than making war on another nation (which Bush has also done).  For this reason, Senators are rightfully skeptical about Bush’s proposal when it sounds like it is from the same playbook titled “Weapons of Mass Destruction.”  This is again I’m post-political in this matter because the economy runs politics (although, as noted, that didn’t stop me from writing my Senators).

Now the another options would be to capitalize the risk and capitalize the reward, but that is what got us in this position in the first place, and no one is willing to bite the bullet and just let the economy, and the American Dream, and the American standard of living diminish (don’t get me started on how this is based on Nationalism and how guarding our markets is the exact opposite of what the Neo-Cons were allowing other nations to do, and how all this led to the insurrection in Iraq).

Now this seems to exhaust the options for the government.  And why I advocate, at the federal level, that if something is going to be done then it should be to socialize the risk and socialize the reward.  (Of course, in secretly hope that nothing gets done and the Capitalist world crashed around us.  But then again, that would probably be worse then I realize, and by the grace of God I’m not punished for my sinner, so I need to not hope for the swift punishment of all those who spend beyond their means).

But there is a fourth option, but it cannot be run through the government, and can scarcely be implemented in the market.  But his would be to capitalize the risk and socialize the reward.  I suppose this would be socially sustainable market relations which do not seek profits over every other benefit.  Maybe I’m wrong, but is this biblical?  That each would gather, but no one would gather too much or too little (Exodus 16:17-19).

More could be said, but I’ve gone on long enough.  All that to say, the event of last week have revealed the true motivations of this administrations (as well as its faith in the Market before all else), as well as revealed that the essential orientation of politics is to ensure a smoothly running economy (rather than things like justice, goodness, peace, or even the commonwealth).

Geoff Holsclaw is co-pastor at life on the vine in chicago and a ph.d student at Marquette University studying liturgy and politics.


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Comments

Viewing 16 Comments

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    If Obama could answer your letter I'm sure it would go something like this...

    Dear Person of faith pastor,
    I don't have much time to be bothered with nonsense like that out here on the campaign trail. I'm too busy traipsing from town to town spending millions of your hard earned contribution dollars being adored by the masses of worshipping fans. I'd like to help, I really would, but I just don't know how due to the fact that I have no prior experience in this matter and it's above my pay grade. However if I do get the chance to vote on a piece of legislation concerning this matter I will most certainly vote--"present".

    Sincerely,

    Barry "smooth daddy" Obama
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    Very interesting. I too find myself sizing things up through an economic lens most of the time. I really liked the description of the bailout as "socializing the risk and capitalizing the reward" and, like you, have romanticized the fantasies of collapse in my head, but know most definitely the suffering it would bring would be horrendous. good article, made for a good morning read here in japan.
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    Well, it seems that the financial package is stalled out because Republicans don't want to be socialist. Not hard to imagine.

    "House Republicans have spent days expressing their unease about a huge government intervention, which they regard as a step down the path to socialism." (http://www.nytimes.com/2008/09/26/business/26ba...)

    The question is will the Right really be able to bite the ideological bullet even at the cost of a severe recession? My question is still, what stake ought Christian have in all this? If our barns (of stocks, 401(k), and IRAs) are burning down, should we rescue them, especially when Christ seem to condemn those who build such big barns for hoarding wealth (Luke 12)?
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    I have no real reasons, yet I instinctively know that Luke 12 (and all the other teachings of Jesus about money) don't apply to me today. ;)
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    O good. now I don't have to be so plagued by bad consciences and doubt.
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    $700 billion sounds like a lot of money, particularly if the tax-payer isn't going to get it all back. It would only cost $50 billion to meet all the millennium development goals..
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    How is it that when we look at empire we recognize violence when it takes physical manifestation, but not when it is financial? Is taxation legalized theft? I still believe it is. Should there be bailouts? The Christian response is that it is not the state's responsibility to rescue anyone, ever. It is the state's responsibility, if anything at all, to make right judgments in court. It is the Christian's responsibility to rescue.
    I agree with many of the blogging professors at GMU (so maybe I'm drinking that kool-aid) that the roots of our current crises may be found in moral hazard generated by implied state guarantees to quasi-privately held firms. This is empire interfering with voluntary action, establishing privilege. Privilege will always be at the expense of the unprivileged at some point.
    Here are some rules for Christians in the market:
    1. Only voluntary transactions are legitimate.
    2. Fraud should be prosecuted by the courts.
    3. Buyer beware. There are no risk - free investments. Either put the work into monitoring your investments carefully yourself, or gamble. Regulation is an attempt to shirk self-responsibility and replace it with government responsibility. This is peculiarly unethical to the Christian.
    4. Things are to be used to God's glory. They are never more important than people. God gives to us expressly so that we may bless others, and win them to the kingdom.

    Again, regulation is the problem, not the solution.
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    You don't believe in taxation but you recognise courts? How are you proposing to pay for a judicial system without taxation?
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    Court fees. The "system" would be much much smaller because the vast majority of victimless crimes would be washed out of the system. Only actual torts and contract disputes which are worth pursuing would be adjudicated. By forcing the interested party to pony up the courts fees trivial matters fall out. In situations where there are actual injustices and some of the least of these cannot pay the court fees Christians ought to step up. Again, they are only the responsibility of the Christian.
    These are illustrative kinds of issues. There is a broad and rich literature on what life-without-the-state might look like among Austrian Economists. All that must be done is to show that "a" solution exists. This does not prove that that particular solution would emerge. We don't know exactly how court fees would be paid, but we can show that there are ways that they might be.
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    juris,

    Thanks for jumping in. I also agree that much of taxation is legalized theft (or might we say governmental extortion), at least on the income tax level. But that will take us far afield.

    In in the post I mostly wanted to focus on the bailout, and how it witnesses to different types of faith: either faith in the government and the people to fix it (and share in the benefit) i.e. socialize both risk and reward; the faith in the market to fix it (by letting bad institutions fail), i.e capitalize risk and reward; or Bush's version to have faith in the governement to fix the market when the market can't fix itself, i.e. socialize the risk and capitalize the reward.

    And yes you are right that this Bush bailout would benefit the privileged at the cost of the underprivileged (another type of trickle down approach).

    On the whole I agree with you rules for the market. But I'm not sure if they dig deep enough.
    Concerning #1, of course I want to advocate voluntary transaction, but I would also want the total cost (economic, social, and environmental) of the transaction to be transparent and included in the price. One way to do this is through gov. regulation. But another is through individual responsible purchases which voluntarily chooses more expensive items because one believes not that we are entitled to a certain standard of living, but rather are responsible to God for how we live (this relates to your 4th point, which should be first).

    Concerning #2, yes I agree. But of course, to persecute fraud is implicitly approve of making contracts. And who punishes those who break contracts? The State has taken upon itself as the sole persecutor of broken contracts by bearing the sword. When societies of honor break down (or are broken down by Capitalism) then people do not self-regulate out of fear of being shamed before the community, then who is going to regulate? The State.

    Concerning #3, don't you really mean "investor beware"? Your example concerns putting money into investments with the hope of return. This is money used "productively" rather than merely for "exchange" of needed objects. I'm conflicted that we should use money this way, and if so how without falling into all the violence of global capitalism. Of course, the buyer should be informed and responsible (as in #1 above). But people would rather have a low price and beg off their responsibility by letting the gov. implement regulations.

    So, perhaps I would say, those are good Christian rule for helping the Market (the Capitalist Market) work better. But maybe we shouldn't attempt to make it work better. But rather to make another type of Market all together.

    (concerning that last statement, this is why I'm not really excited by the 'freegan' movement which is pure protest but not really striving to create something new. Of course I would be good with 'freegan' activities in conjunction with producing alternative, for example, eating thrown out bread even while growing your own wheat to make your own bread.)
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    Geoff,

    I agree with you on the socializing risk and capitalizing rewards stuff. It is pure moral hazard, and it will result in this same situation occurring again and again.

    But, as an amatuer student of the Austrian School (can't believe there's more than one of us here) you've got to understand that what we have is not a free market. The most powerful entity in the country is the Federal Reserve, which, instead of letting markets decide interest rates, chooses to set interest rates according to its purposes. It also gives the government power to do whatever it wishes, but robbing from its people through the inflation tax, but that is a different post all together. When the Fed sets interest rates artificially low (which it does every time there is an economic slowdown) it prohibits the free market from working out the bad decisions.... all the while encouraging more bad decisions. These low interest rates cause malinvestment. One need look no further than the housing bubble... in a true free market system, interest rates would likely be higher, but this would mean that the most efficient uses of resources would be pursued (likely efforts to find new, renewable, efficient energy), but instead, these artifically low interest rates, as well as government forcing banks to loan to people who could not afford a home, caused an asset bubble with homes. Homes are not investments, despite what you might be told by the National Association of Realtors. Because there was a new market for 1st time home buyers who never could afford a home, as well as investment home buyers, you get a striking increase in the price of homes. This actually makes it harder for responsible people working their way up financially to buy a home, and it rewards people for making bad decisions. So, when inflation reared its head, and interest rates rose, we've got WAY too many houses, for too few buyers, prices fall, and banks who create money through fractional reserve banking, all the sudden are shown for what they are, insolvent.

    The free market is not to blame for this. Its the federal reserve and government social planning.

    But, like I said, I agree that we cannot socialize risk and capitalize profits. That's called corporatism. And its bad news.
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    Justin,
    thanks for the response.

    first off, what is the Austrian School? It that of economics, or something else? Sorry I'm so ill informed.

    But second, I never really thought about the Federal Reserves as inhibiting the free market through its manipulation of the interest rate. That makes sense to me. So the bail-out isn't really about saving the free market as it is preserving this form of the market which favors short-sightedness and quick profits (and a low cost of living). Of course the Federal Reserve would claim that it is not favoring bad decisions or malinvestements, but rather that it is staving off inflation (which presumably would hurt everyone which rise cost, but this is really a way of saying that we must preserve a low cost of living.
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    James Madison said "if men were angels no government would be necessary". Regulation is not necessarily the problem, bad, poorly conceived, corrupt regulation is.

    We have become a nation addicted to debt. After this bailout the national debt will stand at an astronomical 11 trillion dollars. Our nation is living off a credit card with no maximum limit and a "pick-a-pay" repayment plan. This is a debt that will be carried by our children, grandchildren, great grandchildren and beyond, all so that we can live well now. It is morally wrong.

    "Fascism should more appropriately be called corporatism because it is the merger of state and corporate power". Benito Mussolini

    Between the bailout, the national debt, the Patriot Act and the Iraq War Resolution we have sold our birthright for a pot of stew.
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    The next depression we enter will redefine what it means to live in America. The question is: how will we emerge from that depression? It is possible that we will simply decline and fade away. But I'd be willing to bet that continued decline will only lead to a more overt imperial posture. Faced with hardship and struggle, we will begin to leverage our advanced weaponry and wealth of resources to expand increasingly through war rather than trade. At the same time, our government will become increasingly centralized.

    Our society still mistakenly believes in moral progress--that the ugliness of America lies mostly in the past, rather than in the present or future. Mark my words: within a generation, that myth will be cruelly exposed.
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    Geoff,
    I'm afraid I only understood half of what you said. I guess I don't quite get all the objections to the bailout.

    I've got hispanic neighbors who struggled to buy a house. They rent out rooms to so many people, so that a house originally designed for four or five persons is housing close to twenty, just so they can make mortgage payments. These are the kind of people who wash our dishes, mow our lawns, and generally work hard doing the kind of work American born persons don't want to do. Many of the foreclosures are happening to people like these.

    If the banking system continues to collapse, the banks will not have any margins to give these people grace or mercy. The bank would be forcing foreclosures faster, just to try and stay afloat. A bailout would allow a possible rewrite of these mortgages and allow these people to keep their homes.

    It seems that the failure of the proposed bailout is because of a revenge mentality. People don't want a small group of greedy people to benefit, so they refuse funds that will help many more people on the margins have grace. In the end, everyone suffers.

    Before we had the federal reserve, American economy went through economic collapses regularly. The federal reserve has been able to keep our economy from experiencing extremes of growth and collapse for quite a while. In the complex world economic situation of the 21st century, they've done an amazing job keeping us fairly stable and generally growing. In an ever-changing environment, I'm not surprised that our system needs improving.
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    Maybe we just need to put some of this in perspective. If the national debt truly is 11 trillion dollars, that would mean that if every single man, woman, and child in this nation were to take an equal share of the debt, we would each owe $36,667. A family of 5 would owe $183,335. This would be on top of whatever other debt we may already hold such as mortgages, car loans and credit cards.

    If we are going to survive for any amount of time, we are going to have to stop purchasing beyond our means and stop making debt a way of life. Your neighbors purchased a home that they couldn't afford. It may not be p.c. to say this, but maybe they sould have simply continued to rent a place to live rather than bite off more than they could chew. Owning your own home, while having its own set of advantages and disadvantages, is simply not a right. It is a privelege, and one that comes with an expensive price tag.

    But we have been programed by the media to have this sense of entitlement that tells us that it is ok for us to over-consume and live in nicer homes and drive fancier cars than we can reasonably afford. I remember when I applied for the loan for my home. We needed to borrow around $60,000. But the people at the bank said, "We can give you a loan for $110,000. You can take the extra money and buy a car or go on a nice vacation." I told them that I didn't want $110,000, I only wanted what I needed. The system is set up to entice people into believing that they can have more than they really can.

    My wife is from Japan. She doesn't understand why americans love to be in so much debt. In Japan, people pay cash for many things including cars and homes. If they do take a mortgage for a home, they typically mortgage a much smaller percentage of the homes value than we do. How do they do it? For one thing, they are more patient than we are. They are perfectly willing to continue to rent a place until they have saved up enough money to buy a house. They take public transportation until they have saved up enough money to buy a car, and then they continue to use public transportation so they don't have to fill up their gas tank every week. It is quite common for children to continue to live with their parents long after most americans have moved out of mom and dad's. My sister-in-law and her husband are in their 40's and continue to live in the same house with his parents. This is perfectly normal over there.

    As far as the federal reserve goes, while their implementation has smoothed some of the peaks and valleys of the economy, their catering to corporate greed have led them to put band-aids over problem that required more serious attention. This bailout is just another band-aid. Like the little dutch boy with his finger in the dike, they are starting to find out that the dike has more cracks and holes in it than they have fingers. It is all going to come crashing down sometime soon and we will all be swept away by the torrent of debt and greed that we have built up.
 

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