The Bailout and the Economy

WHY A BAILOUT?

I constantly think about the bailout and the consequences of this intervention. Our government seems to be doing more to destroy capitalism then to help it. Many would say that this is the overall goal, to incorporate socialism. I like to read from an economist named Henry Hazlitt. He gives this interesting scenario of two farmers:

Suppose that there is a farm for sale. A private lender would normally be willing to lend money to farmer A who has proven his abilities in the past, rather than to farmer B, who has demonstrated a lower level of productivity than has A. However, because government taxes productive citizens or borrows money itself in capital markets, private lenders have fewer funds available to lend to A. Instead, government lends the money to B on the grounds that B is underprivileged, in need of a hand, or some other politically based argument. The more productive borrower, A, loses out on the scarce land while the less productive borrower, B, gains the resources. Because the less-productive individual acquires the scarce resource, there will be less total production, and the entire society is worse off.

In the above example it’s clear that the government takes bigger risks with taxpayer’s money than private lenders take with their own money. Private lenders who make bad loans will go bankrupt and be forced out of business. But when the government gets involved, it lends funds for riskier ventures since the bureaucrats who approve the loan face no personal recriminations — much less loss of profit — for error. We have seen this first hand with sub-prime loans. Government all but forced banks to loan to the “underprivileged,” the less productive borrower, and we have all seen and will feel the effects of this policy for years to come.

In summary private lenders would loan to farmer A, the more productive member, while government lenders would loan to farmer B, and farmer B is the less-productive path. After all, there is no need for government to loan to farmer A; it can be handled quite well in the free market. With less taxation there is even more capital from private lenders to loan to farmers like farmer A. There will be greater production, and the entire society is better off.

THE BAILOUT CAPITAL:

The argument that the government is somehow pumping new capital into the market is absurd. Government is actually borrowing the money from the capital markets that it is in turn injecting into the capital markets. There is no additional source of funding; there is only a diversion of funds from more-productive outlets to less-productive outlets, with government acting as the middleman.
So when Henry Paulson argues that it is necessary to pump money into credit markets to prevent them from freezing up, he doesn’t bother to realize that the money he pumps into the credit markets is coming directly out of the very same credit markets. He is doing little more than rearranging the deck chairs on the Titanic; shuffling the money from one set of financial intermediaries to another does not increase either liquidity or solvency. It merely delays the problem for a few brief moments.
Even the failing banks pay lip service to their fiduciary responsibility, but any privately funded firm that took money from more-productive people to give it to less-productive people would soon go out of business (sub-prime loans). Only the government can violate Hazlitt’s logic and survive, because only government can socialize its losses through the tax system.

Is there really such thing as a “BAILOUT” or is this merely a “STALL” before the inevitable?

Dan Thompson

The Economy is unstable, and we need now, more than ever, safety in our financial planning.

Contact Us

WHY A BAILOUT?

I constantly think about the bailout and the consequences of this intervention. Our government seems to be doing more to destroy capitalism then to help it. Many would say that this is the overall goal, to incorporate socialism. I like to read from an economist named Henry Hazlitt. He gives this interesting scenario of two farmers:

Suppose that there is a farm for sale. A private lender would normally be willing to lend money to farmer A who has proven his abilities in the past, rather than to farmer B, who has demonstrated a lower level of productivity than has A. However, because government taxes productive citizens or borrows money itself in capital markets, private lenders have fewer funds available to lend to A. Instead, government lends the money to B on the grounds that B is underprivileged, in need of a hand, or some other politically based argument. The more productive borrower, A, loses out on the scarce land while the less productive borrower, B, gains the resources. Because the less-productive individual acquires the scarce resource, there will be less total production, and the entire society is worse off.

In the above example it’s clear that the government takes bigger risks with taxpayer’s money than private lenders take with their own money. Private lenders who make bad loans will go bankrupt and be forced out of business. But when the government gets involved, it lends funds for riskier ventures since the bureaucrats who approve the loan face no personal recriminations — much less loss of profit — for error. We have seen this first hand with sub-prime loans. Government all but forced banks to loan to the “underprivileged,” the less productive borrower, and we have all seen and will feel the effects of this policy for years to come.

In summary private lenders would loan to farmer A, the more productive member, while government lenders would loan to farmer B, and farmer B is the less-productive path. After all, there is no need for government to loan to farmer A; it can be handled quite well in the free market. With less taxation there is even more capital from private lenders to loan to farmers like farmer A. There will be greater production, and the entire society is better off.

THE BAILOUT CAPITAL:

The argument that the government is somehow pumping new capital into the market is absurd. Government is actually borrowing the money from the capital markets that it is in turn injecting into the capital markets. There is no additional source of funding; there is only a diversion of funds from more-productive outlets to less-productive outlets, with government acting as the middleman.
So when Henry Paulson argues that it is necessary to pump money into credit markets to prevent them from freezing up, he doesn’t bother to realize that the money he pumps into the credit markets is coming directly out of the very same credit markets. He is doing little more than rearranging the deck chairs on the Titanic; shuffling the money from one set of financial intermediaries to another does not increase either liquidity or solvency. It merely delays the problem for a few brief moments.
Even the failing banks pay lip service to their fiduciary responsibility, but any privately funded firm that took money from more-productive people to give it to less-productive people would soon go out of business (sub-prime loans). Only the government can violate Hazlitt’s logic and survive, because only government can socialize its losses through the tax system.

Is there really such thing as a “BAILOUT” or is this merely a “STALL” before the inevitable?

Dan Thompson

The Economy is unstable, and we need now, more than ever, safety in our financial planning.

Contact Us