Burning the Public Parachute

09/21/2011

Since the 1980s era of corporate takeovers, the golden parachute has become a symbol of executive hiring and retention.

In what may become a dangerous, future precedent, the US government during the tip of the Great Recession manufactured a giant "public parachute." No, not a bailout for the taxpayer; rather, a taxpayer-fueled bailout for the risk-taking so many financial institutions undertook during the run-up to the MBO/CDO crisis that burst the markets in 2008.

Indeed, the US financial services sector, now a critical segment of US economy, then leveraged logic and a desperate Federal Reserve to cash in on a giant insurance payday after years of capitalizing on industry.

The myriad elements of that 2008 "Great Recession" included:

• government programs and policies overstepping the natural market order, families and individuals of average wealth choosing to speculate and borrow outside of their means

• mortgage brokers processing loan documents with little to no oversight or restrictions

• banks and bankers producing creative and complex products derived from pools of rotten mortgages across the real estate sector

• insurance companies executing swaps of immense downside risk using models predicting no downside and

• ratings agencies coloring outside the risk lines to profit off a steep but ultimately fragile acceleration of asset prices

So what does any of this have to do with the public parachute concept?

A lot of people and institutions took risks in order to profit. That is natural capitalism. The US government, however, circumvented a natural free market correction with public insurance. In essence, the US government gave our financial sector a massive Z-pack, instead of letting it develop its own antibodies.

No one can say for sure what the US economy would look like now without stimulus and bailouts to the tune of trillions of dollars. It is no doubt difficult to assess the value of bailing out GM and Chrysler, which both connect to thousands of businesses in secondary and tertiary markets, versus the $10 billion given to Goldman Sachs or $180 billion allocated to AIG.

But the true free market move would have been simple: do nothing.

Let those that gambled big lose big. Let the banks who tempted the wrath of the free market with short-sighted, bottom-line driven hubris - by definition, the opposite of a bank's philosophical mandate to allocate capital efficiently - fail and disappear. Let AIG wither and vanish. Let the mortgage brokers pack their desks and update their resumes.

Let those homeowners who thought the sweet, no down-payment offers and potential for quick equity file for bankruptcy so that their kids learn not to overstretch themselves in the next cycle. Let the free market work itself out as it can when left to do so.

When a system is under siege by something as toxic as the perverse capitalism that seized us all for near a decade, the only thing to do is let the system reset. Completely.

This will not be the last time we see a crisis of such magnitude. After all, the US is a nation of risk-takers, from foreign policy to domestic economy. But the next time the system's fragility teeters on the brink, consider burning the public parachute, and let the invisible hand remove those who chose excess over temperance.