The High Cost of Socialized Banking

I am no fan of welfare. In fact, I take every opportunity to take shots at systems designed to reward laziness, inefficiency, and the subsidizing of poverty. Although there seems to be far more opportunities to write about welfare for the poor, I have even greater disdain for the subsidizing of the rich. So when the stories of banks "on the ropes" and the pending government bailouts hit the news, I was disgusted.

The federal government has announced it was willing to shore up Fannie Mae and Freddie Mac by purchasing its stock if it proved "necessary." Libertarians and liberals were quick to call this "fascism." Strong word, but since fascism entails government "partnership with" and subsidy to business, the shoe fits. That is exactly what the Bush administration appears to be advocating. I can't stomach an administration that, on the one hand, decries welfare for the poor but is willing to dig deep into the government's coffers for big business.

How deep? According to Forbes, "It's going to be a mind-popping $25 billion over fiscal 2009 and 2010, according to the Congressional Budget Office (CBO), which released its estimate of the rescue plan Tuesday morning. Let's put that in perspective: $25 billion for two financial institutions compared with $125 billion for the entire S&L industry in 1989-1991? Ouch." By the way, the S&L crisis was another example of government fascism in support of the rich.

There is another concept in economics that irresponsible banks need to learn. Moral hazard. Moral hazard is the possibility or probability that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Who knows, the current banking crisis may be linked to the S&L crisis of the 1980s and 1990s. If we allowed S&Ls to face the full brunt of their decisions, who knows, financial institutions may have thought twice before diving so quickly into the sub prime loans they are suffering from today. Lesson NOT learned, since government is strongly entertaining bailing financial institutions again.

Welfare is usually dangerous and harmful. When it is done to benefit big business, it is the adding of insult to injury.

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Kevin Price is Host of the Houston Business Show (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.