Privatizing profits and socializing losses
In political discourse, the phrase "privatizing profits and socializing losses" refers to any instance of speculators benefitting (privately) from profits, but not taking losses, by pushing the losses onto society at large, particularly via the government.
The notion that banks privatize profits and socialize losses dates at least to the 19th century, as in this 1834 quote of Andrew Jackson:
I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. ... You are a den of vipers and thieves.
It has been argued that in the current economic system, especially in the U.S., large corporations and wealthy parts of society can socialize costs and privatize profits, with the effect of a further concentration of wealth. Large firms and banks have been accused of this, as a form of crony capitalism and corporate welfare, and some bailouts are cited as examples of this: a bailout socializes a company's losses. In particular, government sponsoring and bailouts such as the federal takeover of Fannie Mae and Freddie Mac and the proposed bailout of the U.S. financial system in the economic crisis of 2008 have frequently been referred to in the U.S. as “private gains and public losses” or “privatization of profits and socialization of losses”. Economic policies that favor such concentration of capital have frequently been criticized as socialism for the rich and capitalism for the poor.
In the financial language of options, "socializing losses" corresponds to private firms having a put option from the government: if they lose, the government will cover their losses. The most famous example of this is the Greenspan put.
- 2. No socialisation of losses and privatisation of gains.
While the term is generally used to critique, some have argued that socializing losses, while politically unpopular, is thought to be economically desirable in the case of a financial crisis:
What is ineluctably needed involves socializing the losses of a banking system – both conventional banking and shadow banking – after the spectacular winnings of the Forward Minsky Journey were privatized.
However this belief is not followed by all economic schools of thought.
- Socialism for the rich and capitalism for the poor
- Concentrated benefits and diffuse costs
- Corporate welfare
- Crony capitalism
- Greenspan put
- Lender of last resort
- Moral hazard in finance
- Private good
- Put option
- Too Big to Fail policy
- CC–PP game
- Lemon socialism
- Robert Reich: A Modest Proposal for Ending Socialized Capitalism, July 15, 2008
- Bloomberg Addresses Pending Financial Job Losses, www.observer.com, September 15, 2008
- What Should Uncle Sam Do?, www.newsweek.com, July 28, 2008
- Prudent reform needed for Fannie, Freddie, July 16, 2006
- Nouriel Roubini: “It is pathetic that Congress did not consult any of the many professional economists that have presented […] alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street”, Nouriel Roubini's Global EconoMonitor, September 28, 2008
- Interview with Jon Stewart, The Daily Show, Oct 16, 2008: Available at The Daily Show Site
- Ten Principles for a Black Swan Robust World
- Comments Before the Money Marketeers Club: Playing Solitaire with a Deck of 51, with Number 52 on Offer, by Paul McCulley
- Who benefits, who pays?, an extract from Filters Against Folly