On government-run capitalism

Ever since the financial crisis, it has become clear that the value of companies is linked with the willingness of governments to bail them out. The top financial gainers from the 2008 bailout program (TARP) were Citi, BoA, AIG, JPM, Wells, GMAC, GM

Largest bailouts in history in 2020 USD ($bn) vs. G7 debt to GDP. Deutsche Bank

In 2020 the covid crisis sheds additional light on the issue. No matter how poorly run a company is, it will receive unlimited funds if it employs enough people or can be considered important to national security.

What makes even less sense is that corporate taxes have been decreasing in the US. As long as the bailout culture remains, taxes should be high because they become a form of insurance against future bailouts. Currently, bailouts and low tax rates are the ultimate wealth transfer from younger generations to the older.

The Eurozone is not sleeping behind the wheel either. The single market has strict rules against government subsidies to allow companies from all countries to compete freely. But these have been suspended as governments spray their economies with $2.2 trillion of support. Germany spent 50% of that amount propping up its businesses. This becomes absurdly anti-competitive if you consider the disadvantage of companies from poorer countries if their governments cannot afford similar subsidies. What’s the point of having rules if they are paused during every crisis?

In capitalism, companies are valuable if they make efficiently something that people want.

That pure equation making capitalism valuable no longer applies. Big business maintains its status by colluding with government to:

  • become systemically important by claiming national security or high employment status resulting in government-financed puts

In either case, capitalism is dead. Welcome to government-run capitalism fueled by moral hazard.

[updated 5/23/2020]