Arguments Against Crony Capitalism

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An additional argument against government injecting money into the private sector is that it promotes “crony capitalism”. Crony capitalism is when a corporation “tries to get a different outcome than would occur on the market by using the tools and machinery of government” surplus” (David Stockman in Solman, 2013). Given that the large companies that would be subject bailouts have access to a wide range of resources and funds, they have a strong ability to lobby politicians in order to achieve their goals. David Stockman, former chief of the Reagan administration states bluntly: “As long as you want the government intervening at will any time there’s an emergency, a crisis, a threat of something going wrong, then money will win, because they will hire the lobbyists, they will hire the lawyers and the accountants, and all the rest of them, and you will get stupid things like Washington bailing out Goldman Sachs, and having Goldman come back within one year with $28 billion of surplus (David…show more content…
The argument is that if firms expect to be bailed out, they will be more inclined to engage in risky business behaviors. In the financial world, one of the primary methods of doing so is to over-leverage the business. Companies will continue to borrow money to grow their businesses expecting that if they are in a liquidity bind, the government will come in to save them. Another type of risky business behavior is failing to oversee or properly assess business risks. The moral hazard of too big to fail institutions also applies to creditors. If a creditor feels that a firm is too big to fail, they will demand less compensation for their risk. The financial markets in general can become less disciplined, further causing destabilization. This, combined with the moral risk within these large firms, can create a spiral effect of irresponsible financial decisions. Executive
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