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Saving capitalism from capitalists

A valid query about the Great American bail-out: will profits be private and losses ‘socialised’?

india Updated: Sep 29, 2008 20:47 IST
Hindustan Times

America’s lawmakers have agreed on a $700 billion bailout package to restore the health of a crisis-ridden financial system. With bank failures rising by the day, the fiscal costs of dealing with them might go up to $1-2 trillion. Clearly, managing banking crises of this scale is not small beer. A detailed International Monetary Fund (IMF) study of 124 banking crises around the world during the last 27 years indicates that the average cost of tackling them averaged 13.3 per cent of GDP. The $700 billion plan works out to only 5 per cent of America’s GDP, but will zoom upwards if the ranks of failed banks like Washington Mutual keep growing.

The current proposal, hammered out by US Treasury Secretary Hank Paulson, envisages a Resolution Trust Corporation of sorts that buys out the distressed assets of the financial sector using taxpayers’ money. The big question is: why should billions of taxpayer dollars be used to benefit a few troubled institutions? Mr Paulson’s plan that taxes many but benefits only a handful evoked a fierce debate in the US Congress. According to the tentative deal, the $700 billion will be staggered: $250 billion on enactment, $100 billion if the US President considers it necessary and the balance subject to Congressional review.

The US response to swiftly deal with its unfolding financial turmoil is not very different from those employed in earlier crisis episodes the world over. However, it raises a lot of troubling questions. Professor Luigi Zingales of the University of Chicago, for one, forcefully argues that the current bailout will shape the type of capitalism during the next 50 years: Do we want to live in a world where profits are private, but losses are socialised? Where taxpayer money is used to prop up failed firms?

As the interests of a few financiers are threatening to undermine the fundamental workings of the system, hasn’t the time come to save capitalism from the capitalists?

First Published: Sep 29, 2008 20:16 IST