Balkinization: Why the Bailout isn't Socialist

Why the Bailout isn't Socialist

Stephen Griffin

I've read one too many articles labeling the bailout "socialist," so I'll take a brief stab at explaining why it is not. First, some definitions that I hope are not entirely idiosyncratic. "State socialism" implies a one-party state, and is not democratic. "Democratic socialism" assumes multiple political parties and thus electoral democracy, although such a state may be "corporatist" in assuming that economic policy should be determined through bargaining among bureaucrats and organizations of labor and capital.

So the bailout is not socialist. We're still living in a democracy, but it's been quite awhile since the government recognized (or could recognize) labor unions as meaningful partners. Most of the labor force is not unionized. Hence, we should expect that many Americans, however represented in various social groups, will not be at the bargaining table. And this is what we do observe. Lobbying over the bailout has been dominated almost entirely by the financial sector to the exclusion of other groups.

There is another way to view the bailout, other than the transfer of the financial sector from a capitalist to a "socialist" basis. The financial sector is being transferred from the capital market to the political market. I say "market" rather than "government" for several reasons. There are other players besides the Treasury and Congress. There are lobbyists, the entrepreneurs of the political market. More important, we have a "weak" national state, one with an expert but limited and fragmented bureaucracy. Notice today's NYT story about how the bailout will be advised and run by private firms. The government simply does not have the expertise or reach to do the job by itself. Perhaps this is the most interesting reason why the bailout is not "socialist" -- our state can't run it!

There's another point I want to highlight by talking about the political market. Members of Congress may look public spirited in a crisis, but they swim in a sea of influence. That influence affected policymaking re the financial sector and housing in both parties over the last decade. Both parties in Congress are in this up to their necks. Just like the bureaucracy, Congress is penetrated by private interests. So a final point about socialism. Socialism is public ownership of the economy. But you can't have such a system if you don't have a "public" to begin with -- a system of government dedicated to the public good. Such a public requires representative institutions that are substantially independent of private interests. Because that is exactly what we don't have, no socialism. Instead, the private capital market must now work through the political market to accomplish its ends. This is less familiar and less certain in some ways than assessing risks in the marketplace. But the historically weak American state guarantees that market principles, not public principles, will tend to be the winners. So I can't be sanguine that the current crisis will lead to more responsible forms of regulation.

Posted 10:23 PM by Stephen Griffin [link]

Comments:

You can't have representative institutions independent of private interests. So this post is saying that socialism (or at least democratic socialism) is impossible. I usually feel like defining things so that they can't exist isn't the most constructive way to advance the discussion, but may Mr. Griffin will expand his discussion to say why this concept that can't exist in the real world is analytically useful.

# posted by

sean : 11:26 PM

Is it too cynical to say we don't have a democracy? Elected politicians have ceased to be representative of those who elected them. Instead, they represent only those who pay them to play.

The Republicans have most blatantly sold out, letting their owners directly draft legislation and regulations. Theres is only the slightest pretense that they do anything other than what their owners tell them to do. But, a true cynic might wonder if the Democrats are fundamentally the same?

# posted by

Mike Zimmer : 11:31 PM

The going critique is that the Paulson plan would have socialized the risk, while privatizing the profit.

Not 'Socialism' in any form.

# posted by

wcw : 12:14 AM

Mr. Griffin raises a good point, but I think there is an answer.

Senator Dodd's bill does not allow for effective control over the financial institutions whose toxic assets are bought up. That is a flaw, but it has a fix.

As I wrote under Jack Balkin's post just below, preferred equity investments would allow for controls of the sort Dodd seems to be angling for (or at least dangling in front of us) and would improve dramatically on his proposal without losing any of its merits.

That such a model exists does not mean it would be used, and I take that to be Mr. Griffin's point. Those who might drive a hard bargain with the distressed firms live their careers out on what amounts to the other side of the table.

But legislators can define a mandate for them to carry out from our side of the table and make them subject them to congressional oversight for the bargain they strike. Dodd set parameters for the agency charged with selling the assets off once they are acquired. This could also be done for the terms on which the assets are purchased. They would not be hard to draft.

Nor should we assume that no one would assume the burden in good faith. I'm no stranger to how class interests shape the way things turn out, even the terms on which they are debated. But I don't assume there are no public-spirited citizens with the wherewithal (and frankly the ego) to drive a hard bargain with the fincial institutions. Warren Buffett comes to mind. He knows where the bodies are buried. But so do many others in business circles, and many of them are equally appalled at the orgy that's gone on.

They would have little to fear in a career-ending move, wanting nothing more than a way to look back on their careers with a sense of having done what was needed. During the Great Depression such people were called traitors to their class, but it's never that simple, and we deny ourselves an option by assuming there are no longer such people.

A better proposal than Dodd's would bring them out of the woodwork.

# posted by

Occasional Observer : 3:01 AM

I think Occasional Observer makes very good points. I do not think that the age of persons prepared to be good public servants is dead.

In addition to Warren Buffet I would mention Mayor Bloomberg of New York who is I believe remunerated by the City with the princely sum of US$1 per annum and Governor Schwarzenegger of California who has shown himself a good public servant able to rise above partisan politics.

Mayor Bloomberg certainly knows the detail of these transactions and has an interest in protecting New York as a world financial centre.

There must be many others.

Another consideration is that the Fed and indeed other national regulators have a pretty good record of only allowing relief at the "emergency discount window" on pretty onerous terms. If the terms were to be so lax as to be possibly categorised as a form of "state aid" - that has competition law implications in both the USA and the EU.

A lot is going to depend on the new regulators regime put in place by the next administration. Were it to be the handiwork of dogmatists such as former Senator Gramm, I would have serious concerns, but I think there is some prospect of the next Administration having rather different views of what is good for America.

# posted by

Mourad : 5:00 AM

wcw said...

The going critique is that the Paulson plan would have socialized the risk, while privatizing the profit.

Not 'Socialism' in any form.

Paulson's plan of purchasing the assets at around 65% of face value has the banks and their shareholders properly eating most if not all of the losses. The Dodd variation would notionally place all of the risk on the banks and their shareholders through a equity plan to cover any excess losses.

What the government is doing is valuing and selling off the assets because the banks cannot do this themselves and get loans using them as collateral. Since the government is not operating the financial sector in any way under this plan, it is hard to call this plan "socialism."

# posted by

Bart DePalma : 9:36 AM

"What the government is doing is valuing and selling off the assets because the banks cannot do this themselves and get loans using them as collateral."

Is the government better at valuing the assets than the banks? Or might "free markets" be better at this? Shouldn't the government be as tough as banks used to be in dealing with valuing assets when a bank customer wanted to use assets as collateral for a loan? Shouldn't banks feel the same pain that they used to inflict upon asset-based borrowers? How can the government enact appropriate regulations for financial institutions if it fails to use appropriate underwriting standards for this bailout?

# posted by

Shag from Brookline : 9:53 AM

shag from brookline said...

BD: "What the government is doing is valuing and selling off the assets because the banks cannot do this themselves and get loans using them as collateral."

Is the government better at valuing the assets than the banks? Or might "free markets" be better at this?

Regardless of whether the government, the banks or the bankruptcy courts after the banks have failed sell the assets, the market in the form of the private buyers will determine the final selling price.

Shouldn't the government be as tough as banks used to be in dealing with valuing assets when a bank customer wanted to use assets as collateral for a loan?

Its not a matter of "being tough," but rather a lack of time and information.

What folks appear to be missing is that banks are almost totally Just In Time businesses which have very little money on hand for day to day operations because it is lent out grow the economy. Thus, the banks cannot operate without day to day short term loans, these loans require collateral and the collateral is suspect.

Short term lending institutions do not have the time nor the resources to value these assets in a 24 hour turn around period and are not accepting the word of the borrowing banks any longer.

The banks can value and dispose of these assets over time, but do not have the time to do so and still continue operations without loans.

In contrast, the government and prospective buyers will have months or years to examine and properly value these assets.

Shouldn't banks feel the same pain that they used to inflict upon asset-based borrowers?

A minimum 35% loss followed by potential further losses under the Dodd plan is pain. Just not enough to drive the banks under entirely.

# posted by

Bart DePalma : 10:15 AM

Governor Schwarzenegger of California who has shown himself a good public servant able to rise above partisan politics.

Actually, CA has quite a serious budget problem of its own right now, caused substantially by the fact that the Governor has mostly signed on to the "no taxes" mantra of the hard right. Any sensible person looking at CA finances would cringe.

# posted by

Mark Field : 10:47 AM

Without repealing the deregulation that 'empowered' wall street into its current mess, any bailout will necessarily be followed by others, possibly larger in magnitude.

Without addressing directly that problem, no bailout is going to last for very long regardless of size and scope. In fact, unless short term lenders gain some kind of confidence in other institutional borrowers, things won't start moving at all.

The lesson from the need for a large bailout is: deregulation failed.

# posted by

John : 10:58 AM

mark field said...

Governor Schwarzenegger of California who has shown himself a good public servant able to rise above partisan politics.

Actually, CA has quite a serious budget problem of its own right now, caused substantially by the fact that the Governor has mostly signed on to the "no taxes" mantra of the hard right. Any sensible person looking at CA finances would cringe.

CA has one of the highest tax burdens in the country and is hemorrhaging business and population. Colorado and the other mountain states are filling up with CA refugees seeking relief.

CA's budgetary problem is that they are spending far more than what their already insane taxes are bringing in.

Judgment day is here for the spend thrifts.

# posted by

Bart DePalma : 11:09 AM

bitswapper said...

The lesson from the need for a large bailout is: deregulation failed.

Non sequitur.

There were no regulations for this eventuality to deregulate.

# posted by

Bart DePalma : 11:11 AM

Bart said:

Non sequitur.

There were no regulations for this eventuality to deregulate.

Banks hid the fact that they were selling financial instruments which were backed by bad mortgages, something which was enabled by deregulation.

# posted by

John : 12:43 PM

Socialism is public ownership of the economy. But you can't have such a system if you don't have a "public" to begin with -- a system of government dedicated to the public good. Such a public requires representative institutions that are substantially independent of private interests. Because that is exactly what we don't have, no socialism.

Talk about quibbling over words! Perhaps "if it's not designed to promote the public good, it's not socialism" is what people in your part of the academy mean by "socialism." But the way the rest of us are using the term socialism means something like "direct government control of the economy" or "government ownership of economic institutions" or something like that. Similarly, people regularly use "public" to mean "government," as with "public schools" or "public parks" or "public utilities" or "public ownership of an enormous chunk of the financial industry." This is a completely normal, conventional, well-accepted use of the term.

Apparently these uses don't conform to what "socialism" and "public" mean in your personal private language. But I, and the critics of the bailout, speak American English, not Griffinese.

# posted by

Unknown : 12:52 PM

So I can't be sanguine that the current crisis will lead to more responsible forms of regulation.

I agree completely. But I have to quibble with Prof. Griffin's use of the term "socialism". State ownership/control of economic institutions is the means, not the end, of socialism. The end is economic democracy, i.e. democratic control of decisions about investment, production and distribution. Granted, democracy implies state control, at least with regard to macro-level decisions. But, and Prof. Griffin himself points out in somewhat different language, the state is not controlled by the people.

This may sound circular and perhaps it is, but any bailout won't be socialist precisely because it is a bailout. It is designed to protect the capitalist economic system from financial catastrophe, that is, from itself.

# posted by

Bob Richard : 1:48 PM