Henry Hazlitt on the Geithner Plan

Journalist and economist Henry Hazlitt, writer of Economics in One Lesson, comments on the role of property rights in the functioning of the price signals:

“It is important to insist that private property and free markets are not separable institutions.  A number of socialists, for example, think they can duplicate the functions and efficiencies of the free market by imitating the free market in a socialist system… If I am a government commissar selling something I don’t really own, and you are another commissar buying it with money that really isn’t yours, then neither of us really cares what the price is” (p. 304).

As I noted yesterday, the Geithner plan has private investors paying $30 billion for access to another $970 billion–for which the taxpayers are at risk.  The Treasury intends to find real market prices for the distressed assets that are, according to Geithner, “clogging” bank balance sheets.  

For our story to fit the one described above by Hazlitt the commissar buying the assets would have to be a private investor paying about 3 cents on the dollar for the goods he’s buying and he wouldn’t be responsible for any risk–besides the 3 cents per dollar.  I’m sure 3 cents would get some people thinking about accurate prices, but would it be the same as if the investor was fully responsible for 100 percent of his investment?  Maybe–under Geithner’s plan, the investor would keep 17 percent of the equity return.

Property rights make losses to investors real.  If an investor has a right to his investments, then he has his “skin in the game” and is properly motivated to responsibly watch over his assets.  Under the Geithner plan, some of the incentives to perform are lost.  If the investments don’t turn out so well, then the investors lose, but only a small amount relative to their potential upside gain.  That does sound like a hedge fund, but from where is the potential $970 billion coming from that the government will loan to private buyers?  What happens if they lose the money?  Why should taxpayers be on the hook for investments that some of us would never make?

H/T to Mario Rizzo.