Friday, August 07, 2009

Paid to Fail

Incentives matter

It shouldn't have to be that way but it is. When the government steps in to cover those that are in default on their mortgage payments to help pay for a rescheduling of the debt, well what does that do? It provides an incentive for people to miss payments on their mortgage so that they can qualify for the program ! And of course it is the taxpayer, or if you will, those that aren't paid to fail, who have to pay for those that do ! Needless to say that is just plain unfair, and is no way to bring sanity to the market.

The second most glaring incidious set-up for failure is the bailouts of finance houses. Those that are healthy pay back the money the government gave them at a fair price. Those that continue to fail get to pay back their IOUs at a discounted price. What does this do? Well it sets-up incentives for companies to either hide their profits and else not make profits at all. Again, this just makes the USA financial markets, at one time the best in the world in terms of rule-of-law, less sound, less rational and less profitable.

One policy (too big to fail and macroeconomic 'control') leads to another (bailouts) which leads to another (less sound markets and therefore diminished investment and decreased standards of living).

Corporatism was supposed to have been deemed unworkable, both ethically and economically, with the failure of national-socialism, but it appears that this lesson of history has been misplaced or, perhaps, purposefully forgotten in the rush by politicians to be seen as "doing something".

Business should be conducted by business people putting their own money at risk and reaping returns for taking those risks. Paying people to fail is not the way the world has created such wealth. The only way for the world's poor to get out of poverty is through economic growth, which comes through trade and investment. Paying people to fail is not the way to prevent failure.