Are There Any Limits on Bad Behavior?

ALEXANDRIA, VA- We have entered a strange new era. Failing businesses – whether financial or industrial – are bailed out by taxpayers, and individuals who took loans they could not afford are subsidized by those who lived within their means.

This is being done with the assent of both political parties. The Bush administration started the bailout process. The Obama administration is carrying it to extremes. Republicans, being out of power, now find the whole notion of bailouts a form of “socialism.” When they held power, however, it seemed to be all right.

Permitting businesses and banks to fail is part of the free enterprise system. “There is something fundamental about the need for failure,” says Syd Finkelstein, a professor at Dartmouth’s Tuck School of Business and author of Think Again: Why Good Leaders Make Bad Decisions and How to Keep It From Happening to You. He declares: “We’re tinkering with the genetic DNA of capitalist society.”

James Grant, founder of Grant’s Interest Rate Observer, points out that in the l870s, there was a five-year depression, followed by the historic era of mechanization that destroyed old industries and generated new ones. “It was a time of terrific insecurity,” he says. “It was also a golden era of dynamism. Such companies as IBM (started in the l880s), Johnson & Johnson (l885), and General Electric (l892) date from that period.”

Commentator Rick Newman points out that companies such as Nike and Reebok “gained a foothold in the l970s because their established competitors – Converse and Keds – failed to foresee the boom in running and aerobics. Toyota has relentlessly exploited the failure of Ford and General Motors to satisfy their customers. IBM went through a near-death experience in the l990s after betting wrongly that the old mainframe would dominate the PC – a painful experience that the company’s leaders now tout as a crash course in adaptation.”

Don Keough, former CEO of Coca Cola and author of The Ten Commandments of Business Failure, states: “Ask l00 people ‘What have you learned from success?’ and most of them will just look at you. But ask what you learned from failure, and you’ll get lots of answers.” Keough points to one of his most dramatic failures, the l985 introduction of New Coke, which market researchers predicted would be a hit.

By subsidizing bad business decisions, we are turning the very idea of capitalism on its head. Chrysler, for example, got its first government bailout in l980. Now it – together with General Motors – is back at the public trough. The carmakers now say that they need $50 billion of taxpayers’ support to see them through. The Economist argues that, “Bailing out Detroit would be a bad use of public money. It would be bad in principle, because it would be an open invitation to companies everywhere to apply for aid to survive the recession…. Nothing would sap a recovery and job-creating enterprises like locking up badly used resources in poorly performing companies…. The U.S. created Chapter 11 precisely to help companies that need protection from their creditors while they restructure their liabilities and winnow out the good business from the bad.”

No one seems to take responsibility for the bad decisions that have led to the current economic meltdown. Indeed, the very men and women who led our financial sector, our auto industry, and the housing market to disaster will be the same people to whom bailout funds are given. The financial bailouts reward bankers who destroyed their institutions by taking irrational risks. The auto bailouts subsidize companies and unions that together destroyed the viability of their industry. The housing plan will force people who bought homes they could afford to subsidize those who did not.

Victor Davis Hanson, a senior fellow at the Hoover Institution, notes that, “Financial wizards like Robert Rubin at Citicorp, Richard Fuld at Lehman Brothers, and Franklin Raines at Fannie Mae – all of whom made millions as they left imploding corporations – had degrees from America’s top universities. They had sophisticated understanding of hedge funds, derivatives, and subprime mortgages – everything, it seems, but moral responsibility for the investments of millions of ordinary clients…. Millions of Americans who played by the rules… lost much of their retirement savings…Yet most disgraced Wall Street elites will retain their mega-bonuses and will not go to jail.”

Thoughtful observers across the political spectrum understand that free enterprise without failure is a far different economic system from the one we have had, and the one which most Americans seek to perpetuate. New York Times columnist Thomas Friedman notes that, “This is not the American way. Bailing out the losers is not how we got rich as a country, and it is not how we’ll get out of this crisis. General Motors has become a giant wealth-destruction machine – possibly the biggest in history – and it is time that it and Chrysler were put into bankruptcy so that they can truly start over under new management with new labor agreements and new visions. When it comes to helping companies, precious public money should focus on start-ups, not bailouts.”

A recent study at New York University’s (NYU) Stern School of Business argues that the government has been too generous to bailed-out banks, giving them up to $70 billion more than necessary. Instead, it declares, it would be wiser to aid healthier banks, while letting market forces work their way with the sick banks. What may be necessary, NYU states, is bankruptcy protection for failed banks and business organizations. After declaring Chapter 11, the government could offer loans to help the company restructure; bankruptcy judges have broad power to remove existing management, cut executive pay, and order major changes. Sometimes, of course, liquidation is the best option.

When CNBC’s Rick Santelli argued that President Obama’s mortgage bailout plan would force hardworking Americans to pay for their neighbors’ mistakes, White House press secretary Robert Gibbs dismissed him as a know-nothing derivatives trader out of touch with Main Street. But, declares Politico, the Capitol Hill weekly, “If the White House simply dismisses Santelli’s point, it may do so at its peril. A Rasmussen poll… found that 55 percent of those surveyed thought federal mortgage subsidies to those most at risk of losing their homes would be ‘rewarding bad behavior.’ Santelli’s ‘Network’-style diatribe has already spawned a Facebook group and plans for ‘tea parties’ protesting the bailout in major cities….”

In the midst of our collapsed economy, no one seems to take responsibility for the bad decisions that have led us to this place. No one in a position of authority has resigned. Instead, we, as taxpayers, are asked to pay for their mistakes. Capitalism involves both success and failure. If we eliminate failure, call it what you will, it is no longer free enterprise.

The Conservative Curmudgeon is copyright (c) 2009 by Allan C. Brownfeld and the Fitzgerald Griffin Foundation www.fgfBooks.com. All rights reserved. Editors may use this column if this copyright information is included.

Allan C. Brownfeld is the author of five books, the latest of which is The Revolution Lobby (Council for Inter-American Security). He has been a staff aide to a U.S. Vice President, Members of Congress, and the U.S. Senate Internal Security Subcommittee. He is associate editor of The Lincoln Review and a contributing editor to such publications as Human Events, The St. Croix Review, and The Washington Report on Middle East Affairs.