Free Market Bailouts is an Oxymoron

One of the courses I’m taking this semester in my MBA program is Business Ethics. As you can expect, discussions in today’s class focused somewhat on the recent events in the financial sector. Specifically, the bankruptcy of Lehman Brothers and the government bailout of AIG. Here is my dilemma with some of the opinions I hear floating around my school and in the papers.

The government just bailed out AIG. This approach signifies a move towards a more socialistic economy where the government controls more services that cater to public interests. I don’t necessarily think the government wants to be more socialistic, but by definition, this bailout is a move in that direction. I am basically hearing two different opinions. One, is that this bailout was a bad idea. The free market determines winners and losers and by bailing out losers, we are significantly decreasing the benefits of a free market. The short term pain will be rewarded by long term efficiency. The other opinion is that the government bailout was necessary because the system isn’t perfect. More regulation is necessary to allow the market to evolve without having it go too far and self destruct as we are seeing now. By having government bailouts, we can sustain the status-quo as well as add regulations and put a focus on business ethics so we can avoid a situation like the one we are seeing today.

The problem I have here is that I believe in the free market and yet if I was running the Fed, I’d probably bail out AIG as well. It’s the lesser of two evils. So what is the solution? How can we sustain a free market society without having the effects of company mismanagement hurt the general public too much?

Since I am in internet related businesses, I look towards the model of the internet for many of my solutions. The internet, for the most part, is the closest to a true free market economy that we can achieve. And some of the most successful internet companies are also the most ethical (examples: Google, ebaY, Amazon, etc). What this tells me is that in a true free market (or as close as you can get), the ethical companies are the successful companies. The free market rewards companies that look out for the general public.

With this argument in tow, it would seem that I would be fine with letting AIG, and Bear Sterns for that matter, collapse because the free market will bring along a more efficient service to take their place. The problem is that the world of finance is not a free market. If AIG collapses, we won’t see a new player take its place quickly. The barriers to entry are enormous. The consequences of a large company failure are far-reaching. Consumers and their needs are an afterthought in these companies. Money is what drives decisions. And normally, corporate social responsibility (CSR) would be connected with money-making decisions to ensure the best return. In finance, however, that is not typically the case.

Do I want the government to bail out companies? No. Do I think it’s necessary at times? Possibly. I think the best solution would be  a move towards less regulation and allow consumers to be more involved in the industry. By easing up on regulation and empowering consumers, you can level the playing field a bit and create more of a free market in the finance industry. That way, when some companies get greedy and make bad decisions, they’ll collapse, but it will be ok. Other companies will swoop in and take their place without much upheival. What do you think?

Can We Trust the Consumer to Make Good Decisions?

One of my friends told me a hysterical story that happened to him this past weekend. Needing to access his attic he grabbed a small powerful flashlight that he had had bought for $50. While ascending the ladder to the attic he noticed the flashlight dimming. In a sudden flash of light the device exploded and sent shattered pieces everywhere. The hilarity came from the description of how one of these shattered pieces hit my friend in the crotch causing a welt in a very uncomfortable area of the body.

The manual for the flashlight recommends that you don’t leave it on for more than a couple minutes at a time. It doesn’t make much sense that a device can explode if used for more than a certain period of time and be legally sold, but my guess is that it was some sort of imported knockoff built without any regard for safety regulations.

After the laughter subsided, the group of people I was with starting discussing responsibility for this accident. While the company that designed/manufactured the flashlight is the obvious culprit, how responsible is my friend? Should he expect better quality from a knockoff product that actually warns you of overusage explosions?

While this example is extreme, it drove home an issue that the United States is dealing with every day. Can we, as a country, trust consumers to make good decisions? In terms of products, healthcare, investments, etc… The fight over the range of consumer power and trustworthiness is debated in the halls of government every day. From my point of view, the upcoming presidential election is heavily focused on consumer power. The argument of small government vs. big government in its simplest form is “consumer makes the decision” vs. “government makes the decision”. While I am typically pro-consumer choice, I think it’s important to limit the metaphorical welts on metaphorical crotches.

The Market For Bad TV is Huge

All too often I hear ideas for businesses that are absolutely great but are targeting a market that is too small. If I’ve learned anything from working for startups, classes at business school, and talking with entrepreneurs, it’s that you’ve got to target a sizable market. Without a big market, your chances of success are much slimmer.

I think about markets as my wife watches “Exiled” while I type this post. It’s a new show on MTV where spoiled teenagers are taken to the middle-of-nowhere to perform manual labor for the first time in their lives and hopefully grow from the experience. MTV produces a lot of bad shows but this one is truly horrible. It’s as if MTV skipped the whole creative process and jumped straight into the focus group stage. They asked a bunch of perky high school girls what they wanted to see and followed every word. To watch this is…well…it’s mentally painful. It’s like I’m de-evolving.

I have to remember. The market for this type of crap is huge. And as bad as it is, it makes sense for MTV to keep on pumping out this junk. I’m just hoping that the teenage world learns quickly how bad these shows actually are. It took them a couple years to realize how bad the boy-bands music was. Hopefully they’ll quickly grow out of this as well.