Over on What's Wrong with the World, we've had another thread about the bailout. I've come out firmly on the side of government's not bailing companies out and not insuring everybody and his uncle. My basic position is that we only think that government can fix these things, whereas in fact the attempt to have the government make wealth out of nothing to save people from the consequences of their actions only makes the bubbles bigger and the falls harder in the long run. I suppose occasionally we might get away with doing stupid things, but you keep doing stupid things long enough, expecting Uncle Midas Sam to create gold out of lead and save you every time, and eventually it catches up with you. Basic Austrian economics stuff, which I gather appears totally crazy to most people. (And which I realize, if applied, would cause a lot of pain to innocent people as well as careless ones, simply because our present economy has been built on a bubble of national debt and empty government promises, and it would be highly unpleasant to admit that to ourselves now rather than pushing it off onto future generations, forcing them to admit it after the illusion is bigger still.)
Anyway, among other things, some of our commentators (and at least one of my fellow contributors) at W4 want to blame the financial crisis on "unregulated capitalism"--that is, the risky derivatives market that is crashing down. Scorn is heaped on what seems to me the perfectly reasonable point about the push to lend to those who are not credit-worthy and the way this spread into the mortgage market and the economy as a whole. But beyond that, no attempt is made on the part of those who say this is the fault of capitalism to factor in the perverse incentive of the expectation of bailout. Sure, people are greedy. And they may do unsustainable and economically foolish things, hoping to get personally rich, if they think they can get away with them because the government will catch them when they fall if their shenanigans get so big and complicated that their fall would harm lots of innocent people. Basically, it's holding the nation hostage for a bailout. Nice. Very human. But not capitalism, by a long shot. In this context, I typed the following comment, with which I'm very pleased, but for which I haven't quite gotten the standing ovation I was hoping. So here it is, for my small and discerning reading audience here at the ol' personal blog:
It hardly seems reasonable to call it "capitalism" when financiers do crazy, unsustainable things having the "too big to fail" idea in the back of their minds. One of the whole points of capitalism as I have always understood it is precisely that it takes advantage of the hard facts of cause and effect rather than trying to make consequences go away. Bailouts negate the entire real-world, reality-check idea that is absolutely fundamental to capitalism. Calling speculative, unsound money transactions undertaken with the assumption that the government will borrow money and get you out of the soup if things go wrong "capitalism" sounds to me like saying that Junior is "hunting" if he goes out, shoots wildly at trees, shoots himself in the foot, Dad pays the medical bills, and finally a dead 10-point buck that somebody else shot is delivered to the front door with "Junior's deer" on a tag attached to its antlers.