Privatizing profits and socializing losses
Encyclopedia
In political discourse, the phrase "privatizing profits and socializing losses" refers to any instance of speculators benefitting (privately) from profits, but not taking losses, by pushing the losses onto society at large, particularly via the government.
:
and corporate welfare
, and some bailouts are cited as examples of this: a bailout socializes a company's losses.
It has been argued that in the current economic system, especially in the U.S., large corporations and wealthy parts of society can socialize costs and privatize profits, with the effect of a further concentration of wealth. In particular, government sponsoring and bailouts such as the federal takeover of Fannie Mae and Freddie Mac
and the proposed bailout of the U.S. financial system in the economic crisis of 2008 have frequently been referred to in the U.S. as “private gains and public losses” or “privatization of profits and socialization of losses”. Economic policies which favor such concentration of capital have frequently been criticized as socialism for the rich and capitalism for the poor
.
, this is formalized as the CC–PP game.
In the financial language of options
, "socializing losses" corresponds to private firms having a put option
from the government: if they lose, the government will cover their losses.
The most famous example of this is the Greenspan put
.
In the black swan theory
of Nassim Nicholas Taleb, he criticizes this as one of his Ten Principles for a Black Swan Robust World, writing as his second principle:
:
However this belief is not followed by all economic schools of thought.
History
The notion that banks privatize profits and socialize losses dates at least to the 19th century, as in this 1834 quote of Andrew JacksonAndrew Jackson
Andrew Jackson was the seventh President of the United States . Based in frontier Tennessee, Jackson was a politician and army general who defeated the Creek Indians at the Battle of Horseshoe Bend , and the British at the Battle of New Orleans...
:
Examples
Large firms and banks have been accused of this, as a form of crony capitalismCrony capitalism
Crony capitalism is a term describing a capitalist economy in which success in business depends on close relationships between business people and government officials...
and corporate welfare
Corporate welfare
Corporate welfare is a pejorative term describing a government's bestowal of money grants, tax breaks, or other special favorable treatment on corporations or selected corporations. The term compares corporate subsidies and welfare payments to the poor, and implies that corporations are much less...
, and some bailouts are cited as examples of this: a bailout socializes a company's losses.
It has been argued that in the current economic system, especially in the U.S., large corporations and wealthy parts of society can socialize costs and privatize profits, with the effect of a further concentration of wealth. In particular, government sponsoring and bailouts such as the federal takeover of Fannie Mae and Freddie Mac
Federal takeover of Fannie Mae and Freddie Mac
The federal takeover of Fannie Mae and Freddie Mac refers to the placing into conservatorship of government sponsored enterprises Fannie Mae and Freddie Mac by the U.S. Treasury in September 2008. It was one financial event among many in the ongoing subprime mortgage crisis.On September 6, 2008,...
and the proposed bailout of the U.S. financial system in the economic crisis of 2008 have frequently been referred to in the U.S. as “private gains and public losses” or “privatization of profits and socialization of losses”. Economic policies which favor such concentration of capital have frequently been criticized as socialism for the rich and capitalism for the poor
Socialism for the rich and capitalism for the poor
Socialism for the rich and capitalism for the poor is a classical political-economic argument, stating that in the advanced capitalist societies state policies assure that more resources flow to the rich than to the poor, for example in form of transfer payments...
.
Interpretations
In game theoryGame theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...
, this is formalized as the CC–PP game.
In the financial language of options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
, "socializing losses" corresponds to private firms having a put option
Put option
A put or put option is a contract between two parties to exchange an asset, the underlying, at a specified price, the strike, by a predetermined date, the expiry or maturity...
from the government: if they lose, the government will cover their losses.
The most famous example of this is the Greenspan put
Greenspan put
The "Greenspan Put" refers to the monetary policy approach that Alan Greenspan, the former Chairman of the United States Federal Reserve Board, and other Fed members exercised from the late 1987 to 2000....
.
In the black swan theory
Black swan theory
The black swan theory or theory of black swan events is a metaphor that encapsulates the concept that The event is a surprise and has a major impact...
of Nassim Nicholas Taleb, he criticizes this as one of his Ten Principles for a Black Swan Robust World, writing as his second principle:
- 2. No socialisation of losses and privatisation of gains.
Support
While the term is generally used to critique, some have argued that socializing losses, while politically unpopular, is thought to be economically desirable in the case of a financial crisisFinancial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
:
However this belief is not followed by all economic schools of thought.
See also
- Bailout
- Corporate welfareCorporate welfareCorporate welfare is a pejorative term describing a government's bestowal of money grants, tax breaks, or other special favorable treatment on corporations or selected corporations. The term compares corporate subsidies and welfare payments to the poor, and implies that corporations are much less...
- Crony capitalismCrony capitalismCrony capitalism is a term describing a capitalist economy in which success in business depends on close relationships between business people and government officials...
- ExternalityExternalityIn economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...
- Greenspan putGreenspan putThe "Greenspan Put" refers to the monetary policy approach that Alan Greenspan, the former Chairman of the United States Federal Reserve Board, and other Fed members exercised from the late 1987 to 2000....
- Lender of last resortLender of last resortA lender of last resort is an institution willing to extend credit when no one else will. The term refers especially to a reserve financial institution, most often the central bank of a country, intended to avoid bankruptcy of banks or other institutions deemed systemically important or 'too big to...
- Moral hazard in finance
- Private goodPrivate goodA private good is defined in economics as "an item that yields positive benefits to people” that is excludable, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits; and rivalrous, i.e. consumption by one...
- Put optionPut optionA put or put option is a contract between two parties to exchange an asset, the underlying, at a specified price, the strike, by a predetermined date, the expiry or maturity...
- Too Big to Fail policyToo Big to Fail policy"Too big to fail" is a colloquial term in regulation and public policy that refers to businesses dealing with market complications related to moral hazard, macroeconomics, economic specialization, and monetary theory....
Related concepts
- CC–PP game
- Lemon socialismLemon socialism"Lemon socialism" is a pejorative term for government support of private-sector companies whose imminent collapse is perceived to threaten broader economic stability. Some assert it is not a subcategory of socialism per se; rather, it points to a corruption of free-market capitalist systems, which...
- Socialism for the rich and capitalism for the poorSocialism for the rich and capitalism for the poorSocialism for the rich and capitalism for the poor is a classical political-economic argument, stating that in the advanced capitalist societies state policies assure that more resources flow to the rich than to the poor, for example in form of transfer payments...
External links
- Who benefits, who pays?, an extract from Filters Against Folly