Corporatism, Bailouts and Moral Hazard

There is a critical component of the socioeconomic narrative that risks slipping under the radar of the panic induced coronavirus. It’s very NB to engage on these subjects because I think we’re entering into a period where social and regulatory structures globally are ripe for change. It’s important for businesses and individuals to be aware of the errors from the past, debate ethical decisions and lobby for outcomes that truly promote worthy distribution of resources. Otherwise, I fear, a more fascist outcome may present itself.

There’s a narrative that America is capitalist machine and that more socialism might be required but I think this analysis misses detail below the surface. The current developments in the US airline industry resemble corporate socialism, not capitalism. Banks and now airlines are being bailed out as though they are public utilities. Yet shareholders and corporate executives benefit from cowboy management; using cash, debt and buybacks to boost share prices and earn incredible compensation packages. Gains are privatised, yet losses are socialised.

Some think about socialism purely in the sense of social welfare checks, a large public workforce and public control over perceived key industries, but this isn’t the full picture. Socialism is just a system of governance determined by the government, rather than the free market. Well, this is exactly what is happening at the moment. Corporates are going to Washington, hands in mouth. It’s only because Washington has such incredible purse-strings and strong relationships with the corporate elite, that these bailouts are possible.

A true capitalist system would allow airlines to fail if they aren’t able to secure funding on the free market.

If the government wants to intervene, then it must structure regulation so that corporate executives have their skin in the game, sharing in both the upside and the losses. Skin in the game incentivises prudent capital management, cash buffers and low debt to ensure long-term sustainability, not short-term profits. Bailing out companies without consideration of the moral hazard created in 2008 and 2020 is a severe failure of government. This type of policy short-termism risks coming back to bite us as individuals form various opinions about “what is wrong with the system.” Bailing out corporate execs isn’t capitalism, its some sick crony corporatism that’s only possible because of the size and centralised nature of government.

Ben Hunt and Nassim Taleb’s articles detail a few of the challenges:

2020_03_19-Do-The-Right-Thing

https://medium.com/incerto/corporate-socialism-the-government-is-bailing-out-investors-managers-not-you-3b31a67bff4a

I’m very positive about our ability to solve these questions. I think it starts with us engaging on them as individuals. Interested to hear your thoughts.


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