The perverse incentive for firms is that the more accurately they structure their financials to be highly vulnerable to systemic risk, the more likely it will be that the decision to do so will be rewarded by policymakers.
Simply put, capitalism isn't capitalism without firm failure and an very clear winners and losers when unexpected events occur. The US economy, which people think is capitalism, is nearly as nationalized and intertwined with government capital as China's economy.
In my view, if we're not going to have capitalism, then we should have a system that is significantly more fair and generous to those in need. If average peoples' life savings are at risk, so too should be banker and executive bonuses (and even jobs).
One can only imagine how much stronger the US economy would be today if the 2008 crisis had led to the smart decision makers being rewarded and the stupid ones being bankrupt. Instead, we had the opposite situation, where the stupid investors got bailed out and the smart ones had their well deserve gains slashed by government policy.
maybe govts are looking at their economies not just as systems of production but literally matters of national security, i.e if an economy looses its largest producers of certain products and industries, it looses a huge amount of economic leverage and hegemony... by bailing out companies temporarily they can be saved, and at least in theory recover faster without becoming vulnerable in the short term
letting companies that are over leveraged or inefficient die may be more “capitalist” (and lead to stronger economy long term) but practically speaking it would most likely be unacceptable damage to a sovereign nation like the u.s
just imagine the u.s without general motors or chrysler or ford for example...
(just to note, i’m not qualified to opine on whether this is good policy, just stating my understanding)
From an economic perspective, we need to think about what our economy is "good at". Generally speaking, when there is demand for something, the economy successfully figures out how to supply it.
With bailouts, there is very little demand for the expertise needed to package and re-sell parts of failed companies to the highest bidder. If Ford had been allowed to fail, perhaps Tesla could have purchased crucial IP or hired entire teams.
The legacy of Henry Ford's entrepreneurship is not the Ford name, it's in the firm's unique business acumen and many years of experience creating excellence. If the larger business (effectively a holding company) called "Ford" fails, the sub-units still have significant value, and the world is better off if that value can be utilized by more capable managers in other firms.
The bailout of Ford effectively punished Tesla, punished consumers, and even punished employees, since their lot is largely a function of the wisdom of those formulating the strategy, something that Ford did poorly enough that it deserved to fail.
that’s a good point, and well taken
i guess the other side of it is, if it’s easy for people to find another job, and/or there is a sufficient safety net, then it’s also probably easier to “just let the companies die”... but i think our system is basically run by those with the money to direct resources in the other direction unfortunately....
Price discovery sounds useful until you realize that the important thing is to just make enough food and meds for everyone, and the rest are mostly details.
Price discovery is the thing that tells people to make food. It is the thing that tells people to make meds.
It's also the thing that tells people to continue making and doing things that people need and aren't meds and food - like keep cleaning the streets, keep up basic sanitation, continue making the electricity run, etc.
Apparently it doesn't, markets are down, in spite of the promise of infinite money.
I think whether we bounce back quickly will depend on how the next few months go and whether countries manage to contain the virus in time or it starts to overwhelm healthcare systems.
All of the funny money in the world won't answer these questions:
1. will a given firm exist in 12-24 months?
2. will anyone want to buy anything from that firm (or that firm's customers)?
3. when will anyone want to buy anything that is not the roof over their head, food or toilet paper?
This should be the job of the federal government, not private investors. At other times we've had better support for these functions of government; the current administration in the US is not so friendly to such silly things as disaster management agencies.
This doesn't seem like a huge public health issue, but it is.
Stopping the market slide gives the public health officials like Dr. Fauci a bit of breathing room. Continued stock market slides will cause politicians to panic and demand lifting of restrictions, even if they're the only thing helping right now.
Or .. and hear me out .. we can ignore the fucking stock market and move to address the public health emergency as our sole concern. The stock market right now is tens of thousands of market participants running around wearing flaming underpants on their heads.
The bond/credit market - yeah, that has consequences. The Fed is already intervening there.
We can. Can Trump? Is he capable of that for more than a week or two?
A panicked President worried about reelection makes bad choices.