The First Rule of the Game: Privatizing Profits, Socializing Losses

Joseph Stiglitz by World Economic Forum
Joseph Stiglitz by World Economic Forum

Joseph Stiglitz, Columbia University professor and Nobel laureate, made the phrase, “Privatize profits; socialize losses,” popular after he used it in an interview with CNBC. However, he isn’t the one who invented it. The notion that banks privatize their profits but don’t take losses, pushing them instead onto society usually through the government, dates to the 19th century and to Andrew Jackson’s quote on closing the Second Bank of the U.S. The problem doesn’t only affect the U.S., however: this is in fact how the secret banking game works worldwide, and society could notice this thanks to the last crisis. Occupy Wall Street, which also popularizes the phrase, isn‘t the only consequence of this growing social awareness.

Capitalism: Privatizing Gains? Of Course!

The current economic system is based on privatizing profits. The definition of capitalism is a system in which individuals and companies are allowed to compete for their own economic gain. No athlete shares his winnings in a contest, so why should banks? They know that sharing with others means losing potential profit, so only competitors who don’t privatize their profits can win. If you think this is unfair, you’re essentially opposing capitalism.

Socializing Losses – Not Anymore?

The problem now pertains to the second part of the phrase we mentioned above. The examples are innumerable: the federal takeover of Fannie Mae and Freddie Mac, the proposed bailout of the U.S. financial system in 2008, the ever-increasing number of bailouts for Greece, Portugal, and Ireland —but also the austerity programs during the crisis when the whole of society suffers.

Tile Bank Sign by Chase Lindberg
Tile Bank Sign by Chase Lindberg

Research by the Chair of Systems Design in Zurich found 147 companies that control 40 per cent of the total wealth of 60 per cent of global revenues, and the authors wrote about this huge network: “Observations suggest that while in good times the network is seemingly robust, in bad times companies go into distress simultaneously.” They lose together while their private gains have almost no effect on the network as a whole. These losses aren’t controlled. When the head of the family loses her work, the whole family, everyone who depends on her, is affected, and the same applies to this family of corporations.

This raises a new question: excluding socialization, is there another option the U.S. financial system or European Union could use to survive? Surely, unregulated markets was the easiest way.

Inequality and Concentrated Wealth

Privatizing gains and socializing losses leads to a concentration of wealth. Although dividing at 99 per cent and 1 per cent is a little bit exaggerated, the growing inequality is now clear — even in Canada. According to a report by OECD, the gap between rich and poor in OECD countries has reached its highest level in over 30 years. The average income of the richest 10 per cent of the population is about nine times that of the poorest 10 per cent.

Furthermore, Luca Angello and Ricardo M. Sousa from the University of Minho investigated the impact of the fiscal consolidation that is usually undertaken during a crisis of income inequality. They showed that when fiscal consolidation is undertaken, it has little or no impact on inequality, but in the absence of crises episodes, it leads to a more unequal distribution of income. In the aftermath of the banking crisis, fiscal austerity has a strong impact on income inequality.

The Conference Board of Canada showed in its map that inequality has grown in the most advanced countries since 2009.

The crisis is still not over, so the gap between rich and poor will possibly continue to grow, and it will become a serious problem for lawmakers thanks to threat of social tension. “The increase in inequality is the most serious challenge for the world,” warned Min Zhu, a special adviser at the International Monetary Fund and a former deputy governor of the People’s Bank of China.

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