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Privatized Profits, Socialized Losses

The Federal Reserve's decision to underwrite the bailout of Bear Stearns, the giant investment bank that's in deep trouble because of its involvement with securities backed by bad subprime mortgages, further exposes what is called capitalism as a system of government intervention on behalf of capital. The problem is, as usual, that capitalism will continue to be equated with "free market," which is now valiantly being saved by George II, Fed head Ben Bernanke, and Treasury Secretary Henry Paulson.

The subprime problem has its roots in pro-business government intervention; the policies at fault were designed to help the housing industry and the lenders who write mortgages. Now the other shoe is falling. Big lenders and investors handling securitized mortgages who are in over their heads will get their promised bailout under the "too big to fail" doctrine. And the rescue will set the table for the next round of bad business decisions and the next bailout. It's called moral hazard.

What does this have to do with the free market? As Kevin Carson likes to say, if this is the free market, then I'm against it. Of course, it is not the free market. The free market is a profit and loss system void of privilege. When businesses fail, they are supposed to actually fail, not turn to the taxpayers. What we really have is (state or political) capitalism, corporatism, or fascism. An essential characteristic of this system is that while profits are private, losses are socialized, i.e., ultimately covered by the mass of people without political clout.

Unfortunately, potential allies of libertarians won't catch the distinction and will thus be further alienated from true free-market thinking. They won't realize that the free market is the system that would deliver what they want, particularly much of what they call "social justice."

Now is the time for us to draw the distinctions as sharply as possible. Down with "vulgar libertarianism"!

Cross-posted at Free Association.