Posted on: October 6, 2009 at 9:00 am

Big bailouts a perversion of capitalism, author argues
BY MATTHEW CROWLEY

http://www.lvbusinesspress.com/articles/2009/10/05/news/iq_31501104.txt

There may be five stages of grief, but economics blogger Barry Ritholtz argues there are 10 stages of bailouts, all of which cause taxpayers grief. For example, a company (think American International Group or Bank of America) risks more money than it should. News trickles from insiders to industry-specific journalists. Corporate managers get antsy. The public panics. Later (hear those hooves?) government comes to the rescue.

In his raucous polemic, “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy,” Ritholtz, who writes “The Big Picture” blog and is chief executive of New York equity research firm Fusion IQ, argues that bailouts are a perversion of capitalism with a mind-bending cost to taxpayers. He figures government bailouts in the last century have cost $14 trillion. That’s more money, he calculates, than the combined inflation-adjusted costs of the Marshall Plan, Louisiana Purchase, race to the moon, New Deal, Vietnam War, Korean War, savings-and-loan crisis, Iraq invasion and NASA space program.

Bailouts violate Wall Street’s “eat what you kill” ethos, Ritholtz argues.

“There are … market players who fail to live or die by their own swords — and then expect to be rescued by others from their own folly,” he writes.

Ritholtz traces bad-idea bailouts back to the early 1970s, when the government saved Lockheed Aircraft Corp. and Penn Central Railroad. Lockheed had been in trouble for years, Ritholtz notes, losing a combined $10.8 million in 1969 and 1970, and had miscalculated on several big U.S. military projects. It got $250 million in loan guarantees. Penn Central, which in 1970 was America’s largest passenger railroad, also had mounting losses; it got $125 million in loan guarantees. In 1976, Congress spent $7 billion in operating subsidies for what was left of Penn Central and five other flailing East Coast rail lines.

“If Lockheed was the government’s first gulp of bailout elixir,” Ritholtz writes, “Penn Central was a big gulp that opened the floodgates for the bailout binge that was to come.”

By saving Chrysler Corp. with $1.5 billion in loan guarantees and $2 billion in commitments or concessions from owners, stockholders and others, the government may have saved 200,000 jobs, Ritholtz writes, but it also forestalled changes that could have prevented further disaster. If Chrysler had failed, he reasons, Ford and General Motors might have rethought their designs and created more attractive, efficient cars. And, he argues, the United Auto Workers, having seen the loss of thousands of union jobs, might have traded pension guarantees and health-care benefits for equity in the remaining Big Two. Carmakers would have been stronger going forward, he argues.

Ritholtz says President Ronald Reagan ushered in a deregulation trend that blossomed into nonregulation, or as he calls it, nonfeasance. Disaster followed, he says.

The 1999 repeal of the Depression-era Glass Steagall Act eliminated rules prohibiting bank holding companies from owning other financial companies. Minus Glass Steagall, Ritholtz writes, the new banking-center companies started underwriting all sorts of exotic products, including credit default swaps and collateralized debt obligations.

Ritholtz finds two main villains behind the current crisis: former Federal Reserve Chairman Alan Greenspan and former President George W. Bush. Greenspan, he said, allowed the housing bubble to inflate by cutting and keeping the federal funds rate, the interest rate at which banks lend to one another, below 1.75 from December 2001 to September 2004.

Although he blames President Bill Clinton for allowing the repeal of Glass Steagall and the passage of the Commodity Futures Modernization Act, which exempted derivatives from regulation, Ritholtz says Bush caused more damage making bad choices for leaders of the Securities and Exchange Commission and Federal Reserve and Treasury Department and for letting his free-markets-reign-supreme ideology rule.

Ritholtz covers the topics in a conversational, digestible way. People who missed the recent news, or slept in economics class, will emerge enlightened, and maybe enraged. They may also be exhausted by the book’s steady spray of superlatives. Reading them all was like having my head banged against a metal locker: “massive” (bam!) “tremendous” (bam!) “unbelievably enormous” (bam!).

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“Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy” by Barry Ritholtz, 332 pages, Wiley, $24.95.

Matthew Crowley is a copy editor for the Business Press’ sister publication, the Las Vegas Review-Journal. He can be reached atmcrowley@reviewjournal.com or 702-383-0304.