Software Nerd

Wednesday, July 30, 2008

Rights: French and American

Here is how a intelligent Harvard professor begins a blog post:

All societies must set limits on health care....
This opening sentence is not the focus of his post, and he probably thinks it is uncontroversial. Laissez-faire is often seen as just another way in which a society sets limits on health care: i.e. by letting individuals decide. The formulation is thus seen as neutral: encompassing all types of systems, from Communism to Capitalism.

However, the formulation reflects a very specific way of looking at political systems.

As illustration, compare the French and American revolutions. Both desired new political systems, based on rights, but they had different perspectives.

The Americans saw rights in the design of man's nature. The key question they asked was: what rights does a man need as protection against tyrants democratic society at large, to make it worth his while to engage in society while pursuing his happiness? Meanwhile, across the pond, the French revolution was conceptualized more as a class-struggle. Perhaps this is understandable, given the historical setting. Their concept of rights came much more from a notion of egalitarianism. The key question here was: how do we design a more egalitarian society?

The French-inspired view is now so prevalent that people (like the professor quoted above) consider it as uncontroversial. They take a system-design perspective, rather than the perspective of what is morally due to an individual person. Finally, this view leads to the type of democracy that the American founders feared.

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Monday, July 14, 2008

Wealth Redistribution

After bailing out Bear Stearns' creditors a few months ago, this weekend the U.S. government decided to bail out the creditors of "Fannie Mae" and "Freddie Mac".

The government's argument goes like this: these firms -- Bear, Fannie & Freddie -- are solvent but not liquid. Since they are solvent, their assets will finally be realized, and will be enough to pay off their liabilities. However, today, there is no market (or a poor market) for some of their assets. So, they cannot meet their short-term liabilities today. The situation, the government says, is analogous to a run on a well-capitalized bank, where the bank cannot meet 100% of its short-term liabilities on demand, but could if given some years.

Also, the argument goes, failure will have a "domino effect". If the government does not bail out Bear Stearns, the confusion that could ensue would bring down much larger firms. Then, one might be faced with the government bailing out someone much bigger, say Fannie Mae or Freddie Mac. Oops, they just did, anyway!

That's the pro-intervention argument. However, if these firms are so obviously in good shape, then why doesn't some other company step in. True, J.P. Morgan did step in to take over Bear Stearns, but only with the government guaranteeing about $29 billion in credit.

Who is the government though? It is you and me. However, in terms of tax-money, it is the big taxpayers in the country: the rich pay most of the taxes. So, consider this: Warren Buffet used to be a large shareholder in Fannie Mae. Then, back in 2000/2001, he sold out almost all his shares in the company. Commenting that he was uncomfortable with the risk, he said, "We're never sure if there is an iceberg situation or not. We figured we'd never see it until it's too late."

Well, Mr. Buffett, you thought you were getting out of Freddie and Fannie, but we voters are putting you right back in. Except, while we use your tax money to take the risk you refused to take, if things work out, we'll spend the profits on "No Child Left Behind".

No, I'm not sympathetic to Buffett, because he buys into this crappy philosophy as well. However, I use him to illustrate wealth-redistribution. Take from Buffett and other rich tax-payers, and pay to shareholders and creditors of Bear Stearns, Freddie and Mac. For the xenophobes among us, remember, this means paying to lots of Japanese and Chinese who thought that these U.S. companies were solid.

As for the "common man" like me, I probably won't be hit much more on taxes, but the when government creates new money, the deficit goes up and inflation rises. Inflation acts like a tax.

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