Stiglitz on Socialism for the Rich

Nobel laureate and former World Bank chief Joseph Stiglitz has weighed in on what he terms "corporate welfarism" and the politics of bailouts, particularly for the banks, but for the auto sector as well. Much more crucial than the amounts spent, for him, are the implicit guarantees offered and the corrosive effect these have on the actions of those who direct these behemoth institutions. In his telling

[i]t has long been recognized that those America's banks that are too big to fail are also too big to be managed. That is one reason that the performance of several of them has been so dismal. When they fail, the government engineers a financial restructuring and provides deposit insurance, gaining a stake in their future. Officials know that if they wait too long, zombie or near zombie banks - with little or no net worth, but treated as if they were viable institutions - are likely to "gamble on resurrection." If they take big bets and win, they walk away with the proceeds, if they fail, the government picks up the tab. . . .

But this new form of ersatz capitalism, in which losses are socialized and profits privatized, is doomed to failure. Incentives are distorted. There is no market discipline. The too-big-to-be-restructured banks know that they can gamble with impunity - and, with the Federal Reserve making funds available at near-zero interest rates, there are ample funds to do so. . . .

This raises another problem with America's too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. Their lobbying efforts worked well, first to deregulate, and then to have taxpayers pay for the cleanup. Their hope is that it will work once again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. We cannot afford to let that happen.

This combination of opportunity and political clout is particularly frightening. Lest we think we are immune, we should remind ourselves that at least the Americans are having a debate; our banks are being bolstered to the tune of $200 billion while our press remains silent.