Legal Commentary

The Return of Lemon Socialsim

By Professor University of Miami School of Law

Last week it was the British government doing it. Now mainstream US economists are proposing that we respond to the mortgage crisis with some home-grown lemon socialism.

I understand the importance of keeping markets liquid. But I have absolutely no desire at all to bail out the shareholders of the banks that made stupid choices, and actually not so much desire to do income transfers to people who bought bigger houses than mine and can’t pay for them.

Isn’t there some way to do the income transfer from the intermediaries who made all the profits and created the moral hazards?

Note: “lemon socialism” has been defined as the subsidization of weaker firms at the expense of stronger firms, but I believe the better definition to be “a form of market organization in which the private sector is allowed (or encouraged) to take above-average risks and pocket the gains, but the public is required to shoulder the ultimate losses.”

Another example of lemon socialism is when the public is asked to take over ownership of loss-making enterprises which have suffered from under-investment while private profits were being taken. But that was last round.

Full post as published by Discourse.net on February 24, 2008 (boomark / email).