Socialist America?

A great man once said, if you can't be used, you're useless. A simplistic maxim, yes, but one that is no less true. In a capitalistic society we commodotize as many resources as we can and then buy and sell them in order to maximize profit. Adam Smith spoke about the invisible hand that controls that market, acting as a correcter and rewarder all at once. In economic terms, markets clear at a price that is defined as the point at which the consumer is maximizing their utility.

At the turn of this decade amidst the implosion of energy and telecommunication companies like Enron and Worldcom; employees were experiencing windfalls on Wall Street. These windfalls came in the form of stocks, bonuses and options. There was some discussion about the size of these compensation packages, but this carping was tamped down because companies were doing exceedingly well. The thought was, if the companies are doing well, then high executive compensation is not a bad thing. Companies and executives did not reject the compensation that they saw as being justly deserved. They were not required to turn a percentage of 'excess' profits over to the government. After all in capitalism, innovation and high profit margins are celebrated and heralded as evidence that competition works.

Therefore, I was extremely surprised after the failure of one insurance company, bank and brokerage firm after the other, panic set in about the necessity of a plan from the government to stem the failures. I had grown up with the understanding that America was capitalistic and adopted a laissez-faire policy on excessive government innovation into the markets. So why should the government bail these companies out? After all the government doesn't operate with the same profit maximization approach that private companies use, so why then should low risk money be put into a mechanism that is high risk/high return?

At a recent congressional hearing, Alan Greenspan, former Federal Reserve Bank Chairman and staunch advocate of deregulation was left with mouth agape trying to reconcile the reason for bank failures and extremely risky investments that were improperly hedged. His reasoning had been, that for companies to maximize self-preservation they would seek for the appropriate formula of high risk/high return that was suitable for their balance sheet. In this way the companies would protect themselves from demise and self-police. As is the case, we see that many companies had severely overextended themselves in an effort to buy into the risky system of subprime mortgages that had been buoying companies for the first half of the 2000s. When the bottom began fall from under the housing market, so too did the risky home loans that had proliferated. With hemorrhaging balance sheets, and losses piling up, the final recourse was to tap into the government.

But in a capitalistic system, the government's role is extremely limited and certainly does not include artificially injecting large sums of money into the market to get it to work. Maybe we are not as capitalistic as we believe we are. Maybe these companies knew that the government would be there for a bailout and spent recklessly until they had to come come hat in hand to the government's doorstep asking for assistance. The unfortunate fault in this theory is that it is not a reciprocal relationship. When the economy was doing well and the housing bubble was growing at a record pace, capitalism was vociferously championed. Exorbitant sums of money awarded to executives was defended as deserved compensation. Yet, now that the markets have plunged and a mood of gloom has surfaced, the bulls of the market are seeking the protection of the matador.

The sad part is that they have been duly welcomed. Remarkably, the unfortunate part is that no one executive or member of the executive and senior level of management at the imperiled companies will become paupers. These minor setbacks while devastating will not destroy them. However, for the millions of people who have to put off retirement, or have to see their portfolios shrink like an obese person after gastric bypass, they have no golden parachute offered by the government. No assurance of the solvency of their investments, no assistance on any level.