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.
Related or Semi-related Video
Finance: What is the Difference Between ...6 Views
finance a la shmoop - what's the difference between a private company and
a public company? one word- regulation. well private companies have virtually
none. that is they are only quote regulated unquote by the contracts that [chains fall off building]
are passed among the key parties. I agree to invest such and such amount of money
to buy this many shares- and outlining the contract here in runs what happens
to that money given various outcomes. well private companies are usually
funded and covered by the wealthy. and the government feels that the wealthy
can afford their own damn lawyers that they have enough education to know that
they need lawyers ,and while they're on their own. but in the case of public
companies things are different the government feels like it owes protection
to Jo Plummer sixpack who invests his hard-earned 3 grand a year in savings in
coca-cola stock. coke arguably the most public of public companies lives under [Coca Cola shares and price pictured on a website]
all kinds of rules. disclosures of operations disclosures of finances and
disclosures of governance and CEO compensation or bottling plant problems
in South Paulo or even that lawsuit over the carbonated swimming pool boondoggle
in Nairobi. why so much paperwork and disclosure bureaucracy? well the
government feels that if they require all these notices from coke then Joe
plumber 6-pack is somehow protected as if Joe ever read those coca-cola
document disclosure statements. yeah pretty much never. would Joe understand
them even if he did read them? well probably not so why bother with them? in [man sits behind tall stacks of paperwork]
theory it's just meant to be an added layer of protection for stockholders
just in case Joe decides to take a shmoop financial literacy course someday and
becomes a Rain Man level genius with you know the digits. of course on the other
hand there are a lot of government people who need employees and coke pays
lots and lots of fees for all of that disclosing, so as usual you know follow
the money. [man walks down yellow brick road littered with money] oh yeah.
Up Next
A private investment company is an investment company that is not subject to the same regulations as public investment companies.