Privatizing the losses doesn't mean the rest of us are going to escape without a scratch. It just means that we let fail the things that are going to fail.
What makes this so politically unpalatable is that having constantly bailed out the last few cycles, everyone is now operating on the assumption that they will be bailed out, so many entities who in a more perfect world would know better have done a lot of stupid things, like pensions that have a lot of bonds that will go bad if the AI bubble collapses.
Frankly we're looking at massive problems and upheaval at this point no matter what we do. But the advantage of not socializing the losses is that the signals of what needs to be changed go directly into the economy. Socializing the losses means that the signals get muted, confused, and mangled and people in the future end up doing the wrong things as a result.
Unfortunately, at this point I think the choice is between people clearly and forthrightly losing massive portions of their retirement as visible losses, or people deceptively losing massive portions of their retirement as the bailout creates massive inflation and their retirement is inflated until it has a fairly similar amount of losses. Unfortunately, it is a feature for the rulers that the bailouts obscure the losses and dampen the correct apportionment of blame, even as it destroys the underlying economy. Giving people clear, correct targets for their rage, the same process of correct pain apportionment the economy needs to become healthy again, would point people at the "wrong" clear, correct targets, and the clear, correct targets are the ones deciding whether or not a bailout occurs. Not just the literal lawmakers nominally making the call, but the entire system that makes the decision.
So plan on bailouts.
Plan on them trying bailouts. Every inch of us should resist.
We've been living in an economy distorted by the forces that lead us to this point. We've been locked into the decisions necessary to keep things going as they have been, whether or not they make sense.
The correction that you're talking about frees us to actually make choices. Some of them will be tough choices, but we finally get to make them, with all of our resources and work ethic intact, which don't just disappear because a stock index craters.
If we want trains and local farms instead of data centers and new iPhones, we can actually make that choice, instead of being forced into the latter because every investment fund is pumping them to the point of being a foregone conclusion.
To borrow an aphorism: the bust is a feature, not a bug.
I remember the prevailing opinion in 2008 was that not bailing out would have caused much worse problems. We'll never know I guess
I think the precedent folks were pointing to was the great depression--no strong signal of assurance to temper public concern means things like bank runs and sudden collapses of institutions that would have otherwise made it because of group fear. Not sure how accurate that comparison is though.
We do definitively know, with climate change level certainty (read: there is still the odd ball expert that dissents), that it absolutely needed to happen.
What is much less known, because it kinda kills the talking point, is that the "too big to fail" bailouts were fully repaid with interest, to the tune of an ~$17B profit.
The losses from the program were from the auto industry ($12B) and the struggling homeowners fund ($31B). Which is a bit ironic, because those two are probably the ones that would have the most public support.
What would have happened if we hadn't? What was the doomsday scenario? And, crucially, what would have happened next?
Doomsday scenario is a self-reinforcing feedback loop of:
1) economy tanks, people earn less disposable income or become unemployed
2) consumers spending less tanks the economy even more
We have historical precedent for this in the great depression, and the government going hands-off back then made the problem almost certainly much worse.
You could even make a pretty credible argument that the Nazis only got into power thanks to this, so there's your doomsday scenario.
I don't think this characterizes the situation accurately. The economy doesn't cease to exist, it moves out of the existing financial system. Able-bodied workers, supplies, equipment, knowledge all still exist, they're just awaiting orders. You have your choice of how to spur productivity with the extant resources, including direct investment and propaganda. Many people credit WWII for the recovery, but it was actually just those two things, with the war as the excuse. But you can do it without a war, as with the Japanese economic miracle: some amount of austerity, everyone works towards a common goal, the government backstops the effort. Bonus: no golden parahute overhead.
I think we screwed up after 2008 and I would like to see us get it right this time. The government absolutely should be hands-on, but the focus should be on raw productivity and public well-being, not making certain that certain firms survive the bloodbath.
You know what's a great economic stimulus? You now own the house you owe a mortgage on, clear and free. "But that would bankrupt the mortgage-holding bank!" Okay.
I don't disagree with most of what you say, but one crucial point you miss in my view is that letting public trust in banks & "the economy" collapse is really "expensive" (in hard productivity, not just on paper).
This is what was allowed during the great depression and what we desperately tried to avoid in later crises.
Western democracies are not set up at all to let the government direct and compensate millions of workers on the turn of a dime; micromanagement by government in such a situation can be expected to be extremely wasteful and ineffective, and this only got worse, because we have less generic/unqualified use for human labor than in the past (construction, railroads, motorways, heavy industry), and specialists are even harder to manage.
If everyone stops even just believing in the ability of local supermarkets to provide toilet paper next week or, on the other end of the spectrum, starts distrusting the banking system/dollar entirely, then the consequences can be extensive, expensive and slow to recover.
It might even be worth it to feed taxpayer money to rich greedy capitalists because the public comes out on top still by avoiding that trust collapse.
That's fair, but I think you're again conflating trust in the overarching institution with trust in its current constituents.
This is important because it exposes the needle you have to thread: messaging that makes clear that you're intentionally throwing out the old banks and companies (or their leadership) in order to preserve their prosocial functionality without their antisocial dysfunction. People who are happy to see Goldman Sach burn still want a way to safeguard their money; people who want Mark Zuckerberg to pay the piper don't necessarily want to lose their Instagram galleries or Facebook connections.
The people who run these companies want us to believe that a collapse of the status quo is a total collapse, but it's not. And a government that facilitates transition of ownership and leadership to more capable hands doesn't have to follow the oligarch playbook; different ownership models and transition processes exist.
I'll give an example. Consider people living in a corporation-owned apartment complex. The company collapses - most such corporate landlords collapse - and maybe the bank holding the loan does too. There is no world in which the complex sells at its previous value, and there is probably a temptation to facilitate some transaction, any transaction, that would bring things back to order by designating a concrete owner. Of course, there are people living in the complex, and God knows what happens to them when God knows whoever shows up claiming rights to the units.
Or.
The government steps in. They claim eminent domain and set aside reasonable funds to pay whoever turns out to be the final previous owner. A co-op is formed and ownership is transferred to the current residents as a subsidy; they now own the units they previously rented. Their lives are not disrupted by forced eviction; the municipality is not disrupted by an explosion of homelessness. The main losers are the old owners and banks, and they're bankrupt and dissolved anyway. Life goes on.
I'm not saying that it's an easy transition. Russia showed us how to screw it up. But the successful scenario is a far better outcome for far more people than throwing our hands up, exclaiming that we don't know how to do anything without letting vulture capitalists have their way, and inviting them in to freely carry out the exact scenario (which continues to distort markets and makes the next reckoning all the worse) which is the failure mode of the above proposal anyway.
Some countries like Iceland let their banks fail (in no small part because their total debt was something like 10x their gdp), and they even successfully prosecuted a number of executives. They got moderate slaps on the wrist but did serve some token time in prison as opposed to having to pay a ground-breaking fine of 5 minutes of revenue as is more typical. It wrecked their economy in the short-term but they were back to growth by 2011, and had a larger than ever economy by 2015.
But I think more than the one-off situation is also the precedent it sets. When you can bank on the government bailing you out (pun intended I guess?), it creates a perverse incentive of just trying to get as large as you possibly can, all foundation or principles absolutely be damned - because once you get big enough you win, even if you're the biggest loser ever. And I do think that's what we're probably seeing with LLM companies.
Not that LLM's a loser - it's a revolutionary tech and will only become more so. But multi trillion dollar valuations for a product that has viable open competitors already available and whose operating requirements continue to plummet and will almost certainly continue to plummet? This is extremely amusing, but absolutely batshit insane. It's like paying millions for a pretty flower because it's novel in spite of the fact that you know, and everyone else knows, that once people start planting them there will be endless amounts available for negligible cost.