Monday, September 15, 2008

Role of Government Rant #1

From time to time I just have to rant, and one thing that really brings out the rant in me is government interference in the marketplace. So when I feel one of these coming on, I will post a paragraph or two and then go to the bathroom until the rant feeling is gone.

In the wee hours of the morning on Monday, Lehman Brothers, a 158 year old Wall Street brokerage firm, filed for bankruptcy. This action will effectively bring the company to an end. As a result, 26,000 employees will have to find other work. Now I feel sorry for each and every one of them, as most of them had little to do with the failure of the firm. But I was listening to NPR this afternoon and they were interviewing employees as they came out of the building.

Many of these employees are Ivy League educated and have presumably had classes in economics. However, one of the interviewees made me doubt my assertion when he was asked if he thought the decision not bail out Lehman by the American tax payer was a good idea. His answer was that it should have been a no-brainer. He couldn't believe there would not be a bailout. How could the government allow Lehman to fail? He finished it off with a snide comment about how much money is spent in Iraq. Presumably he feels that that money could be better spent giving Lehman more money to squander since they ran out of their own. Or perhaps he just feels like he is owed a job and a paycheck. Either way he had me yelling at my radio, which looks really odd to the person in the car next to you.

Who does this guy think he is asking me to pay for his errors? Maybe he didn't personally ruin Lehman brothers, but he certainly contributed through his employment there. In the free market, inefficient use of capital will be replaced by more productive capital...that is, unless the government takes your money and gives it to the inefficient capital users like Lehman so that they can continue in their folly. A better solution, is to allow these firms to fail. They will file bankruptcy, and the investors who willingly took the risk to invest in them, will foot the bill rather than the taxpayer.

This will have two effects that result in more efficient use of capital (and hence more wealth creation.) First, the people responsible for the failure will be held accountable for their poor decisions, hopefully never being given that responsibility again. And second, the investors who lost money will now be better evaluators of risk when putting future capital to work. They will demand more accountability. They will be more cautious, more efficient. This is the natural corrective mechanism of the market. If we don't allow it to operate properly, then we can't complain when things aren't working.

Since the government knows less about running a business than the idiots that sank it, then why would we give them the reins to take over and throw good money after bad? Why should life long politicians, most of whom couldn't run a faucet, much less a business, be deciding what businesses should be saved? Let the market decide! The agregate deciscions of shareholders and customers...the market...ultimately make the best choices. It can be painful, for sure, especially when the problem has been created or fostered by unaccountable management and over reaching governement. We can keep management accountable by becoming informed investors. We can keep government from over reaching by voting. It should be up to us...the market.

Ok, I feel much better now.


Tam said...

Did you run out of toilet paper with that rant?

Tam said...

Great point though! I totally agree.

Star said...

Amen to that!