The Red Flag: An Examination of the Social and Economic Implications of the Recent Government Bailouts

Bailout. This one word has inspired more commentary than any other in the past few weeks. However, with every news outlet in the world talking about the bailouts of Fannie Mae, Freddie Mac, and AIG, I find it interesting how the ideological implications of these actions are only now starting to receive some attention. Most media has been focused on the direct, economic impact of Congress's decisions on the stock market now and in the near future, as well as the simple dollar figures for what the bailouts are going to cost taxpayers (see below, left). While this aspect is obviously important, there are deeper, more long-term consequences to the government’s actions. With the most recent buyouts, federal insurance for risky mortgages, economic stimulus packages, and ban on short selling of financial stocks, the government has been taking actions contrary in nature to the free market economy it was founded upon and more in line with the communist, government backed system it has been fighting against for the better part of a century. Is this the end of capitalism as we know it? Did the government take a step in the wrong direction by bailing out this country’s financial system? No, probably not. While the recent government buyouts of Fannie Mae, Freddie Mac, and AIG go against the capitalistic ideals of this country, they were necessary in order to help keep the country out of the depression it was headed towards and will eventually be seen as the right decision by the federal government. Assuming the government does not continue to take over companies or impose its will too much on the companies it already controls, these actions will be seen as temporary socialist interventions like those during the Great Depression and not the beginning of the decline of capitalism in America.

Despite the fact that most of the actions the government has taken in the recent past have be socialist in nature, the United States is not moving down a path away from capitalism; rather, it has simply been following a history of free market capitalism supported by moderately socialist government policy. Capitalism is an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decisions and by prices, production, and the distribution of goods that are determined mainly by competition in a free market. Socialism is the opposite. It is composed of a government controlled economy in which the means of production are federally controlled. Today, the American economy cannot be accurately described by either word in itself, but more of a combination of the two. Originally, the it represented the epitome of a capitalist society. People spoke of the “American Dream,” of common men coming to the United States and working their way into fame and fortune. However, the American economy has gradually shifted away from a true free market economy towards a mix between capitalism and socialism. True, the most recent wave of attempts to revitalize the economy by the United States government have been some of the most extreme ever, but regulation of our financial markets has been a critical part of our economy since the Great Depression. In fact, one of the reasons these problems arose was the deregulation of the financial markets that allowed instruments like mortgage-backed securities to exist and subprime loans to be issued. Like it or not, the government has a history of stepping in during times of financial crisis and taking extreme measures to protect the economy (see the New Deal). For the most part, it has always been justified and ended up having a positive influence on the economy. If the United States government had not stepped in and taken the actions it did, the economic fallout would cost taxpayers much more than what it has cost to effectively bail out the housing market. According to Jeanne Sahadi, a senior writer for CNNMoney.com, “If Fannie and Freddie went under…the housing industry could seize up, causing the loss of millions of jobs.” Or, in terms of actual dollars and cents, an article by James Pethokoukis, the money and politics blogger for U.S. News & World Report, claims that the dollar cost of not bailing out Wall Street could range anywhere from $15 trillion over four years to upwards of $30 trillion. The financial markets would crash and credit markets would completely freeze, making it impossible for students to get loans and families to get mortgages. If these estimates are anywhere close to the truth, the government intervention in this financial crisis will prove to be a brilliant move that effectively saved the American economy.

There are those who argue that these bailouts set a poor example for financial institutions, especially how it guarantees money for the larger financial institutions at the expense of everyone else (see below, right). As Andrew Horowitz, founder of Horowitz & Company, says, “In a capitalistic society that relies on a free market system, we should only look to the government to guide and regulate against fraud and the manipulation of the system... it is not to be a business partner and a sugar daddy there to provide a backstop to the bad business practices of the banking system.” True, there is the potential for companies to take these bailouts as a figurative safety net for them, guaranteeing their continued existence despite any risky practices they might engage in. However, given the necessity for a dramatic move by the federal government to turn the economy around, there were not many other options. Ideally the government would not have to come in and financially back the banking system, but in times like today, people have to look past their ideals to what is the most prudent and effective solution for our financial crisis. Like the co-host of CNBC’s “Squawk on the Street” Mark Haines observed on “Morning Joe”, “Nobody really likes this on a philosophical basis, but we live in a real world and we can’t, can’t dither with philosophy when such serious matters are at stake.” Only time will tell whether or not the government made the right decision, but given the situation at the time, it made the best possible move by intervening in our failing economy. Either way, this bailout is only a temporary fix. Unless we do something about the unchecked greed that is at the root of all these problems, we will not be able to fully recover from this recession.