Privatizing Profit and Socializing Loss

With all the recent talk about socialism, I think its important to understand how major corporations routinely privatize profits and socialize losses. This concept is not new and dates back at least to the 19th century. It has become blatantly apparent in the 21st century with the tax-payer bailout of the Banking industry. When risky financial speculation creates profit, it is spread among shareholders and CEO’s but when something goes wrong, the losses are spread out among the tax-payers. An example of a negative externality, corporations in the energy sector will pollute the environment and leave the tax-payers with the clean up bill. After the 1987 stock market crash, the Gulf War, the Mexican crisis, the Asian crisis, the LTCM debacle, Y2K, the burst of the internet bubble, and the 9/11 attacks, the Federal Reserve used the “Greenspan Put” to socialize the losses when the speculative bubbles burst. Bernanke, the new Federal Reserve Board chairman, continues to use the same practice.

Essentially, while the rich get even richer through riskier business practices, the rest of us pay for it. The whole system is an ingenious way to steal our money and concentrate that wealth in the hands of ruling elite. We’ve also allowed many industries that should be socialized to be privatized and we are paying for it. Utilities such as water and power, as well as the banking industry and health care, should be socialized because it reduces abusive and risky business practices while at the same time putting any profits directly back into the hands of our government. If properly run, this could drastically reduce the average American’s monthly bills, reduce taxes, curb our ever increasing national debt and improve the general quality of life for American citizens. Many utility companies take in large profits while socializing the expense of maintaining parts of the infrastructure necessary to keep themselves in business. Socializing certain industries is not unheard of in a capitalist society and doesn’t mean that the entire government is socialist. It also does not mean that there can’t be private banks or health insurance companies for “premium” service or care. What it does mean is that those banks and health insurance companies would have to compete with government run companies whose primary goal is a low risk, affordable, stable business instead of a business driven by profit alone.

If, on the other hand, we are so afraid of socialism that we can’t bear to de-privatize the industries that are robbing us blind, we can at least open up to a real free market. By socializing loss and bailing out the banking sector, because these banks are perceived to be “too big to fail,” we are really saying the free market doesn’t work and the government needs to step in. The free market can work if it’s not heavily manipulated and regulated by institutions like the Federal Reserve, government subsidies and corporate tax breaks. If there isn’t an option to be bailed out, risky business practices are uninsurable and less likely to be put into practice. If there is proper federal oversight and regulation, we can avoid dangerous business practices that harm the national economy, the consumer and the environment. If the Fed didn’t control interest rates and money flow, loans and credit would be based on the real market and not a speculated market. We wouldn’t have manufactured booms and busts, instead we would have real market fluctuation, based on periods of saving and spending as well as real supply and demand. (See Austrian Economics for an interesting theory on the boom/bust cycle). Some people are getting really rich off the manipulated market and its not us. Instead we are being robbed blind on a daily basis.