This is capitalism?! Too Big To Fail Strikes Again

In the past decade or so, I’ve become increasingly confused as to what capitalism actually is.

As a naive youth, I thought that capitalism was about private individuals and groups pursuing profits, taking risks and being rewarded or punished for their decisions.

Create a product or service that the public wants, and you will be rewarded.

Sometimes, out of your wildest dreams.

Make poor or criminal decisions, and be punished.

Sometimes, out of your wildest dreams.

Lately, not so much.

Whether they are smart, dumb, good or bad, decisions have consequences. Success isn’t guaranteed. Failure is a real possibility. That’s risk!

Of course, capitalism cannot regulate itself entirely, so the government plays a key role in punishing criminal and anti-competitive behavior, such as insider trading or monopolies.

These ideas are so basic, but it’s as if they’re a foreign concept in our country.

Recent days have me yelling: “This is capitalism?! This is capitalism?!” and channeling my inner Randy Marsh.

The coronavirus crisis illustrates this sad truth with the “Coronavirus Relief Bill”, aka the CARES Act, which Congress passed on Friday. NPR provides a great summary of what the bill does.

Just for comparison, the CARES act is 2.1 trillion dollars of economic stimulus. The 2009 American Recovery and Reinvestment Act, passed after the 2007–2008 financial crisis, was 830 billion.

That’s over twice as much!

There’s too much to analyze in the 880 pages of confusing language at one time, so I will focus on different parts in several posts.

Today, provision that makes my blood boil: a possible bailout for some big businesses.

The CARES act allows for 500 billion in “loans and other money” for big corporations.

The airline industry has been hit especially hard by the crisis, with both domestic and international flights being cancelled left and right. However, if the average person is expected to have an emergency fund covering expenses of 3–6 months, why shouldn’t big corporations like the airlines have to do so as well?

The drastic measures against the coronavirus crisis are barely a month old, if that. Yet these companies need loans to remain operational? Already? According to consultancy CAPA Centre for Aviation, “most airlines will be bankrupt by the end of May unless governments intervene.”

Where the hell did their profits go?

According to Bloomberg, major airlines such as Delta, United and Southwest have used ‘roughly’ 96% of cash flow on stock buybacks in the past decade. Buybacks can show that a company is confident and is willing to invest in itself. But they do cause controversy.

As Redditor H3BREWH4MMER summarizes, “If you invest in yourself when your stock is extremely overvalued, then you took my money and invested it into an overvalued asset instead of returning it to me for use elsewhere.”

According to Business Insider’s Joseph Zeballos-Roig buybacks reduce share count, increasing value for the investors “without directly helping businesses.” Mr. Roig references Columbia University Professor Tim Wu’s argument that airlines, such as American, “could have stored up its cash reserves for a future crisis, knowing that airlines regularly cycle through booms and busts.”

A crisis- like the one we’re currently in? Gee, who’da thunk?

If the companies followed sound financial planning advice with an emergency fund of 3–6 months, we might be talking about a bailout or loans at the end of May. Might. And by then, the world may be somewhat returning to normal.

The 500 billion in the CARES act, along with how quickly it is ‘needed’, reminds me of the “too big to fail” doctrine which became popular after the 2007–08 financial crisis. As Investopedia defines it:

“Too big to fail describes a business or sector deemed to be so deeply ingrained in a financial system or economy that its failure would be disastrous to the economy. Therefore, the government will consider bailing out the business or even an entire sector-such as Wall Street’s banks or U.S. carmakers-to prevent economic disaster.”

The logic makes sense, but it lessens or even eliminates the consequences of bad decisions. The airlines spent 96% of cash flow on stock buybacks. They choose to do that. No one compelled or threatened them to do it. And now, they can’t weather a month of crisis. They can’t handle the consequences of their bad decision making.

That isn’t capitalism. Do the taxpayers get to share the airlines’ record profits? No, and we shouldn’t. Instead, we get to pay exorbitant fees for everything under the sun when we fly in those large sardine cans called planes. So why should we cover their ass when they gotta face the music?

We need to prevent these companies from becoming too big in the first place. No company should be immune from the consequences of its decisions. As former Federal Reserve chairman Alan Greenspan said, “If they’re too big to fail, they’re too big. In 1911 we broke up Standard Oil-so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”

An idea worth exploring after two massive corporate bailouts in the past twelve years.

Assuming that “Economic disaster” was averted by said bailouts-and I am skeptical of that claim-the cost is great. Perhaps even more than the bailouts themselves. Will the American people have to save too big to fail companies every time there’s a crisis? How often will there be crises? What incentive do these giants have to manage risk and act responsibly if they know they will get some sweet taxpayer dollars?

I was done with “too big to fail” a few years ago. The coronavirus crisis shoves its ugly head down my throat yet again.

This isn’t capitalism! It’s big government sleeping with big business.

And I’m beyond tired of it.

Aren’t you?

Originally published at https://theprimacyofpolitics.blogspot.com.