Privatizing Profits And Socializing Losses

We’ve all been there: when you do well, someone else takes credit. When you mess up, you take the fall for it.

Some have criticized our society and government for doing the same thing, but with money. Privatizing profits and socializing losses refers to shareholders getting money when all is well, yet not paying any money when problems arise...those are paid by taxpayers.

It’s a normative economic term, meaning it’s ideological. No wonder it was born in an op-ed about a government bailout in the 1970s. From an economic perspective, this term is arguing that we should treat problems caused by firms like we treat pollution caused by firms: make them pay for it. In economics, that’s how we “internalize negative externalities.”

Take the Financial Crisis of 2008, for example. Bank shareholders were making big bucks off of banks…”privatizing profits.” Some of those juicy profits were from sketchy subprime mortgage packaging. Banks were “hiding” bad loans in pretty loan packages, grading them as AAA when it was really just a steamy pile of poo. Eventually, that caught up with them, leading to the Financial Crisis of 2008.

While shareholders may have “paid” in some sense for the crisis (taking a hit in profits), they didn’t actually pay to fix the problem. They just experienced the problem, like everyone else. The Fed decided to bail out the banks, using American taxpayer dollars to pay for the problems caused by reckless banking, i.e. “socializing losses.”

Over $400 billion in taxpayer money was used to rescue firms in trouble from the crisis...many of the same firms who caused the crisis in the first place, because it was profitable. At the same time that over 800,000 homes were foreclosed, some failing banks were giving their employees million-dollar bonuses.