Lynn Smith: Privatizing profits and socializing costs

EDITOR'S NOTE: The views and opinions expressed are those of the writer and not of Ottawa News Network.

In recent decades, government intervention has often resulted in hefty profits for individual corporations while the costs of business failures and corporate malfeasance are borne by society.  

The government’s selective use of subsidies, bailouts, customized tax treatments, and military adventurism erodes public trust, exacerbates wealth inequality, and creates social instability. We’ll look at four distinct examples: The subprime mortgage crisis in 2008-9, Operation Iraqi Freedom, the recent Venezuela invasion, and the trillion-dollar investment into artificial intelligence (AI).

When President Obama took office in 2009, our economy was in free fall, and the global financial system was gripped by panic. The key question faced by both policymakers and the banking industry was what should be done about the “too-big-to-fail” financial firms that had created the crisis. Several key institutions were heavily laden with the subprime mortgage pools that had become the financial equivalent of toxic waste.    

Savvier firms like Goldman Sachs and JPMorgan Chase had already made big bets against the housing market and consequently were able to defend themselves against the looming disaster. But if mega insurer AIG and money-center bank Citigroup went down, it was likely they’d take the whole system with them.

By late 2008, Bush’s Treasury Secretary Hank Paulson had constructed the $700 billion Troubled Asset Relief Program (TARP), and it was summarily approved by Tim Geithner, Obama’s incoming treasury secretary. It failed to pass Congress on the first attempt, but with Obama’s support as president-elect, TARP passed the House and Senate the second time around.  

The result was a complete bailout of the nine largest American banks, and AIG (temporarily) handing over 80% of their equity in exchange for a $180 billion loan. Additionally, Fannie Mae and Freddie Mac were nationalized, and the Detroit automakers were rescued. 

The American public was less fortunate. Banks had been profiting mightily by selling subprime mortgage pools to naïve investors, and had created a housing bubble by granting mortgages to millions of financially unqualified home buyers who had bought their new houses at the market top. At the height of the crisis, underwater home loans totaled more than $1 trillion, and 10 million families were forced out of their homes through foreclosure. Neighborhoods, particularly in the rust belt, became economic time bombs as abandoned houses reduced the value of adjacent properties.

Inexplicably, the Obama Administration sought no changes in bank management, set no limits on compensation packages, and demanded no reductions in the dividends paid by the failed banks to their shareholders. Unfortunately, this is not the only example of an administration enacting public policies that resulted in the economic injustice that now pervades much of American society.   

In 2003, when President George W. Bush launched Operation Iraqi Freedom, it was justified as a search for weapons of mass destruction. Of course, the imaginary WMDs were never found, and the war has since been widely discredited, but the costs remain very real: 4,419 American lives were lost, along with hundreds of thousands of innocent Iraqi citizens.  

According to Brown University’s Watson School of International and Public Affairs, American taxpayers spent $1.79 trillion on the ill-conceived Iraqi war, and not surprisingly, a large portion of it ended up in the hands of private defense contractors.  

Operation Enduring Freedom, on the other hand, was intended to be a limited but decisive response to the 9/11 terrorist attacks by Al Qaeda in 2001. Tragically, the war in Afghanistan lasted for 20 years with 900,000 lives lost and associated costs exceeding $2.3 trillion, according to Brown University. Approximately 40% of the cost went directly to five military contractors: Lockheed Martin, Boeing, General Dynamics, Raytheon, and Northrop Grumman. 

It’s no accident that defense contractors collectively spend more than $150 million a year lobbying Congress because military adventurism results in very robust profits. In contrast, small businesses, the economic engine of the American economy, will never have the financial wherewithal to influence public policy in their favor.   

In my next column, I’ll explore the exploding developmental costs of artificial intelligence and the economic and political expenses associated with our recent invasion of Venezuela. Please stay tuned for "Privatizing profits and socializing costs (part 2)."

— Community Columnist Lynn Smith is a retired wealth management executive who resides in Holland. Contact her at lynn.angleworks@gmail.com. 

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