Moral Hazard, Precedent, and Corporate Entitlements

I don’t pretend to know what would have happened had not Bernanke et al. pulled the trigger on the Bear Stearns bailout, but I have to admit to some serious discomfort with the precedent that it sets.

Corporate America is now a protected class, which implies something terribly distasteful, something terribly inconsistent with classical notions of market economics. In short, corporate America now proudly (!) possesses one of the most coveted commodities in our New New Deal fabric: an entitlement.

What it says, over all, is this: there is a point at which corporations get so big that they cannot be allowed to fail.

It also suggests, though, that perhaps we shouldn’t blindly hope that they get that big in the first place. Yet even to think that makes a conservative sweat a bit because of where it logically leads:  policy to discourage or even prevent corporations – which are, if anything, voluntary financial associations whose freedom ought to be protected to the greatest possible extent – from becoming “too big to fail.”

It seems to this undereducated boob that the market itself needs a reminder now and then, in the form of a true failure. For the long term, what could be more informative to the market, to boards of directors, to CEOs, and to shareholders than to experience a huge-scale failure owing to what amounts to greedy carelessness? And wouldn’t that be more true to the market’s original assumptions?

We seem to want to have our cake and eat it: we want freedom as long as we’re making profit, but we want to be wards of the state when we’re blowing it.


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