Friday, February 20, 2009

How Capitalist Capital Markets Should Work

Amidst the deafening moans for bailout money issued from across the business landscape, it is refreshing to see just one instance of the good, old fashioned capital markets working again. In the old days, before "bailout" became a source of competitive advantage, firms who needed funds to support operations went to capital markets. Depending on their risk and return, these firms would raise debt or equity cash, and investors would take some form of a stake in the firm. In those days, you had to compete with other firms for funds based on your virtues as a business, catering to the self-interest of investors. Now, you go to the government, hat in hand, and compete with other firms based on your vices, catering to bureaucrats and politicians' sense of pity. Who might have the strategic edge in that race?

As I said, it is refreshing, then, to see the capital markets return once in a while, to remind us what honorable business looks like. As this article describes, Sirius XM has been in dire straights for some time. They have severe cash flow problems, stemming from the worsening economy, and the fact that their business model is shaky at best (Howard Stern notwithstanding). So, as their debt was about to come due this month, rather than ask the government for handouts, they found a businessman, in the form of Liberty Media's John Malone, to take on a large portion of their risk in exchange for a sizable return. Notice, an individual made the choice with his money, eyeing his self-interest, to invest in a struggling enterprise. No one had to be coerced; no one's tax dollars were devoted to a dying cause. If enough dollars think the business is worth saving, they will find their way to that business through capital markets. The government needn't offer its dubious services.

The satellite radio industry is a very interesting one, in my opinion. I did some writing on it over the summer when I was working at The Heartland Institute. At that time, I was defending XM and Sirius' right to merge. Clearly, the merger did not help them get out of their hole much, but if they can stick it out through this downturn, they might be able to rebuild their market in a couple years. The important take-away point is the economic efficiency and moral superiority of capital markets, as compared to bumbling government failure funding. Capital markets reward expected future success with present funds. Governments, when they grace the economy with other people's stolen money, reward expected future failures, leaving successful firms to fend for themselves in a depleted private financing market.


  1. Thanks so much for sending this post in to the Objectivist Round Up! Really appreciate it! (And try not to hold it against me that I'm a Boilermaker! :) )

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