The Paradox of Bailouts
Posted by Steve Markowitz on January 7, 2012
Since the failure of Lehman Brothers, governments worldwide have responded with bailouts and flooding the market with liquidity, i.e. printing money. These radical actions have been justified with the claim that without them, financial Armageddon would have occurred. It is not possible to now determine if that was the case. However, it is clear that these actions enabled those who made bad financial decisions to be rescued at the expense of others who acted more prudently.
Unsaid by those who favored the bailouts and other related policies were the potential repercussions of these radical actions. Some of the repercussions have already been felt, most notably the ongoing sovereign debt issues in Europe and the unemployment rates in the West that remain stubbornly high. Other lurking issues include new asset bubbles yet the pop and the potential for significant inflation. Whether each of these possibilities occur is not the issue. However, there will be costs associated with the alchemy inflicted on the economy by these actions. The fact that those who implemented the policies refuse to even acknowledge the downside potentials and instead advocate even more intervention is a clear indication of the dangers lurking.
Recently, Dr. John P Hussman of hussman funds.com, posted his New Year’s greeting with his hope for 2012, included below. These brief comments asked the right questions and points appropriate solutions for the paradox of bailouts.
John P. Hussman, Ph.D. (hussmanfunds.com)
Happy New Year. We enter 2012 with a great deal of hope, but our hopes are not for more bailouts, or money printing, or any of the myriad policies that investors seem to hope will save bad investments and sustain elevated valuations. Instead, our hope is that in 2012, the market will finally “clear,” in the sense that bad debt around the world will be recognized as bad and restructured; that overleveraged financials will be taken into receivership instead of forcing austerity on every corner of the global economy in order to make them flush again; that rates of return will rise enough to compensate and encourage saving – and high enough to encourage borrowers and other users of capital to allocate the funds productively. Of course, in order to restructure bad debt, someone has to accept a loss. In order for rates of return to rise, valuations must decline. In short, our hope is for events that will unchain the global economy from an irresponsible past and open the gates toward a prosperous future. Maybe that is too hopeful, but we are not entirely convinced that bailouts and ‘big bazooka’ will be as easily procured in the year ahead as a confused public has allowed in recent years.”