"Part of the genius of Marxism, and a reason for its enduring appeal, is that it fed man's neurotic fear of social catastrophe while providing an avenue for moral transcendence." -- Bret Stephens, in today's Wall Street Journal. A few characters long to fit in a Tweet.

Today's New York Times has two stories that illuminate the risks of government ownership and "bailouts." One article highlights how, with AIG subject to government ownership and pay controls, it is ceding some ground to a privately held competitor controlled by its former CEO, Maurice Greenberg. The article has a slightly disapproving tone: "Mr. Greenberg's success may be at the expense of taxpayers. People who work in the industry say that if he is already luring A.I.G.'s people, he may soon be siphoning off its business and, therefore, its means to repay its debt to the government." But the same could be said of any insurance company that is profiting at AIG's expense. Just because the government takes over one insurance company, are all the other ones supposed to stop trying to build market share for fear that their success in competing in business might siphon off money from the taxpayers? By this logic, Toyota and Honda should stop trying to succeed in the auto business for fear they might profit at the expense of GM and Chrysler's ability to pay back funds to the taxpayers. A second article documents how, in the GM bankruptcy, unionized pensioners of the Delphi auto parts company were rescued, but salaried pensioners were not. Reports the Times:

Highlights of the $787 billion federal "stimulus" spending, according to the Wall Street Journal: $55,000 to spay and neuter dogs and cats of low-income residents of Wichita, Kansas; "a $6 million snowmaking facility in Duluth, Minn.," and "a $3.4 million 'ecopassage' to help turtles cross a highway in Tallahassee, Fla." And that doesn't even mention windmills for the well-connected.

The New York Daily News recently ran an op-ed piece with the headline, "Got flu vaccine? Thank big gov't: The H1N1 response is a great example of your tax dollars at work." The article, by Mathew Dallek, the acting director of the University of California, Davis, Washington Program and a Shapiro Fellow at George Washington University's School of Media and Public Affairs, says, "The government's handling of the H1N1 flu vaccine offers a vivid example of federal action that is clearly beneficial to the vast majority of the American people. So, how about a round of applause for 'big government'? Don't hold your breath. Four decades worth of anti-Washington fervor simply runs too deep for rays of gratitude to break through the dark clouds… bashing government ought to be less of a knee-jerk default position in our society; even anti-government ideologues should acknowledge when the feds get a big issue right."

The whole question of how the banks were "forced" to accept government money is one that is worthy of some further investigation, I noted in an earlier post about a banker who refused TARP funds. The "forced" formulation has been used in connection with Wells Fargo, as I noted here; even Warren Buffett, as I also noted, bridled a bit at how the government set the terms of its loan to Wells Fargo under the TARP: "the government set the terms on it. They [Wells Fargo] just signed a blank piece of paper." Now Bloomberg News has a review of Andrew Ross Sorkin's "Too Big To Fail" that helps shed some light about the moment when Treasury Secretary Paulson brought the Wells Fargo chairman, Richard Kovacevich, in for a meeting:

Bloomberg News has an account of what it calls "a contract that hedges nothing" -- an agreement under which New Jersey taxpayers have paid $11.4 million to a Goldman Sachs-led partnership "for protection against rising interest costs on bonds that the state redeemed more than a year ago." As the Bloomberg article also recounts, Harvard University also got in trouble with these interest rate swaps; the wire service says the university "disclosed it had given $497.6 million to investment banks to exit such agreements." The Goldman managing director who sold the swaps to New Jersey Transportation Trust Fund Authority now also serves as a director of the Municipal Securities Rulemaking Board that is the self-regulatory body for that part of the financial industry.

"in my mail came a letter from a credit card company -- actually, a large British bank -- informing me that the new penalty annual percentage rate on my card will be "the Prime Rate plus a margin of up to 26.99%" Said the letter, "Based on the Prime Rate as of August 1, 2009 the current Penalty APR would be up to 30.24% corresponding to a Daily Periodic Rate ("DPR") of .0828%" That's a pretty hefty rate at a time when inflation is minimal. ...it is interesting that at a moment when the administration, the Federal Reserve, and Congressional committees that oversee banks have a stated policy of trying to protect consumers and loosen up the flow of credit in the economy, banks are jacking up rates. Maybe they are trying to make all the money they possibly can now before Congress and the administration create a new regulatory agency to protect consumers?" -- FutureOfCapitalism.com, Credit Crunch, September 8, 2009.

The Obama administration will propose that banks "divide the function of chairman and chief executive between two executives," the New York Times reports. FutureOfCapitalism.com commented on this idea months ago, when it was Senators Schumer and Cantwell who were proposing it for all public companies, and had this to say:

With the Yankees scheduled to play tonight and potentially clinch a spot in the World Series, the Tax Foundation has a timely reminder that if the series ends up being played at the new Yankee Stadium, it will be on the back of $942 million in tax-exempt bonds. The Yankees owners and its star players, who are rich and well-connected, end up benefiting from a special tax exemption that costs everyone else. Sure, Yankees fans in the bleachers and the hot dog vendors outside the stadium benefit, too. But why should fans of the Red Sox, who, as a New York Sun editorial pointed out, play in a 95-year-old unsubsidized ballpark, see their competitors benefit from tax-exempt financing?

My former New York Sun and Forward colleague Seth Lipsky has a column in the Wall Street Journal arguing against a government subsidy for newspapers. "I've come to the view that the real protection of press freedom is in the idea of private property," he writes. "The best strategy to strengthen the press would be to maximize protection of the right to private property—and the right to competition." One point that Mr. Lipsky neglects is that some newspaper companies have already received government subsidies. Rupert Murdoch's News Corp., which now owns the Wall Street Journal, received a $20.7 million subsidy in 1996 from New York city and state and a $24.4 million subsidy in 1998 for a new printing plant in the Bronx for the New York Post. The New York Daily News received a subsidy of more than $35 million from New Jersey when it moved its printing plant there in 1993, according to Good Jobs New York, a group that is a watchdog on these special corporate tax breaks. And the New York Times received a subsidy of $28.7 million for a printing plant in Queens in 1993 and a subsidy of $18.7 million (the Times itself put the figure at $26.1 million, and noted that opponents said the subsidies could be as large as $70 million) in 2001 for its new headquarters building near Times Square in Manhattan. These subsidies have been given without the dire consequences for press freedom of which Mr. Lipsky warns in his article, though they did precede a decline in the profitability of the local daily newspaper business in New York. This is not an argument for a subsidy of newspapers, although, if the taxes of working newspapermen and their owners are to be taken to subsidize investment bankers (Citigroup, Bank of America), automakers (GM and Chrysler), insurance companies (AIG), doctors and drug companies (through Medicare and the "public option"), and alternative energy providers and their hedge-fund and private-equity-fund owners, at a certain point one wonders whether an industry that refuses a subsidy on principle is just a sap. Mr. Lipsky's new book The Citizen's Constitution: An Annotated Guide is in stock and shipping at Amazon.com. (FTC disclosure: Amazon gives FutureOfCapitalism.com a small cut of the revenue of readers who click through and order the book.)

The Economist, after an interview with Goldman Sachs chief executive Lloyd Blankfein, describes the bank's claim that it would have survived without government intervention as "implausible." To "calm the public mood," the magazine recommends that the bank make a big charitable contribution, "in the billions of dollars." What the Economist doesn't say is that for American C corporations, charitable contributions in most cases are tax deductible up to 10% of net income. So some of the money that Goldman would give to charity would have otherwise gone to the American government, i.e., the taxpayers who bailed the firm out to begin with. The rest would have gone to the firm's shareholders. Goldman may justify the charitable contribution to shareholders as, essentially, a marketing expense needed to keep the firm's public image positive enough to enable it to advocate for favorable public policies and to allow it to attract and retain capable employees and, therefore, to earn more money for shareholders over the long haul. The flaw with that argument, though, is that a big charitable gift from Goldman winds up reinforcing the idea that giving money away to non-profits is somehow more socially valuable than lending it to entrepreneurs or returning it to shareholders as dividends that the shareholders can then decide to save, spend, or give away on their own as individuals. It's a view that finds Goldman's main activity -- making money -- not valuable in its own right, but tolerable only because the money can then be given away. The case Goldman Sachs really may be better off making is a different one: that the work it does -- efficiently allocating capital, providing liquidity and capital and advice for entrepreneurs trying to grow their businesses, providing returns for shareholders and challenging, lucrative jobs for employees -- is valuable in its own right. If the company spent billions of dollars educating the public on that principle, the benefit to the company long-term might be better than the burst of good feeling that might accompany a charitable contribution, no matter how worthy the cause. Somehow I bet the charitable contribution that the Economist has in mind for Goldman isn't to, say, the Foundation for Economic Education or the Mises Institute.

Posts here and here yesterday focused on the Securities and Exchange Commission's press release that strangely highlighted what it said was Raj Rajaratnam's status as a "billionaire." It's worth noting that the U.S. Attorney's Office for the Southern District of New York put out its own press release (pdf) on the case and, unlike the S.E.C., managed to do so without characterizing Mr. Rajaratnam's wealth.

The taxpayers of New York City and state are forking over "$80 million in tax credits and other subsidies" to back a shopping mall in East Harlem that will include a Costco and a Target in a shopping mall partly owned by Forest City Ratner, the New York Times reports. It raises the question: why should the money of small shop owners be seized from those small shop owners and used to subsidize stores that are going to compete with them? And why should the taxes of small landlords be taken and used to subsidize a real estate giant whose tenants will compete with those of the small landlords? (Or, for that matter, why should the shareholders or employees of non-subsidized Wal-Marts have their money taken in taxes and funneled to benefit their competitors, Costco and Target?) The Times article reports:

The project began to pick up speed after Forest City, a partner in the development of the headquarters building of The New York Times Company on Eighth Avenue, became involved. Having a well-connected local partner added strength to the project, Mr. Blumenfeld said.

The governor of the Bank of England, Mervyn King, gave a speech (pdf) yesterday in which he made some tart observations worth repeating:

It is hard to see how the existence of institutions that are "too important to fail" is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don't, distorts the allocation of resources and management of risk.

And:

Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.

"He downplays the statistics ranking America's health care system as lagging those of some other nations, saying that many of those rankings are skewed with criteria that favor single-payer systems." -- "Scott Gottlieb on Health Care," FutureOfCapitalism.com, October 13, 2009.

"Ill-Conceived Ranking Makes for Unhealthy Debate" -- The Wall Street Journal, October 21, 2009.