Bryan Caplan  

Bailouts: When Will They End?

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On Economic History... Musings on Macro...
I've been against bail-outs from the beginning.  So should have all economists.  It's reasonable to debate the merits of contracyclical monetary policy.  It's not reasonable to debate the merits of rewarding failure on a grand scale.

Alas, in "practical politics" almost no one's interested in figuring out whether we took the wrong course two years ago.  Instead, it's all about the latest crisis - and the next crisis on the horizon.  It really does seem like the crises just keep getting bigger: Wall St., Greece, then what?  Italy?

My point: One bailout seems to lead to another, but bailouts have to stop eventually.  What begins as "too big to fail" eventually becomes "too big to save."  So here's my question: Where will the line be drawn?   Who's going to be in the water when the "sink or swim" verdict finally comes in?


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COMMENTS (23 to date)
ThomasL writes:

I think us. I don't imagine we will give up until we have bailed all we possibly can.

To continue your watery metaphor, I think we are the passenger liner that tragically sucks down all the lifeboats with us when we finally sink beneath the waves.

Kevin Bob Riste writes:

Lehman Brothers? The bailouts will end when the global economy has recovered and not a moment before. The die is cast.

Wow, link fail.

http://cheapseatsecon.wordpress.com/tb2s-club/

kev writes:

Italy is too big to save. They'll sink or swim, Germany can't save them.

Matt writes:

Isn't there a bailout by bailout method? I think people can argue that the banks needed a bailout to keep the troubled financial system afloat. Is there a way of measuring potential private sector loss vs. public sector debt to evaluate each bailout?

MernaMoose writes:

One bailout seems to lead to another, but bailouts have to stop eventually.

You mean they have to end? You're just kidding. We can rack up the social security and medicare bills, fight three or four small wars at the same time, stack ObamaCare on top of it, and just keep going forever and ever amen.

Our elites here in the US know what they're doing. Trust them. Because they learned all their philosophy from European elites. Who know what they're doing and we should hope to emulate them.

JPIrving writes:

My guess is it will end with the next recession. The moral hazard will encourage the banks and the Greeces of the world to continue with their overoptimized strategy of high leverage. Then next time demand drops in a big way they will be in even worse shape, and the debt of the rescuers (Big country govts) wont be any better than they are today. There just wont be enough money. It will be high/hyper inflation or let them fail. Either way it should destroy any appetite for bailouts.

Of course if we could go 10 years without another major recession that might be long enough to pay down some of the debt, so maybe they could do another round of bailouts. But who wants to take that bet?

Floccina writes:

The excuse for all these bailout is that they cause feedback that will cause even more failure.

So why do governments treat monopoly as bad in private business but make monopolys of their own and treat them as good. I am referring to the government monopoly on currency/money which is in my mind at the root of the feedback problems in the financial system. The feedback is what lead to the bailouts.

We need to design a monetary system with a fail safe. We need to design it because it cannot evolve because of the central bank's monopoly! You cannot have natural selection without diversity!

Mike Gibson writes:

The question is--who will bail out the bail out men?

When Greece defaults, it will cause some soul-searching among the wealthier countries. These countries may propose some mild austerity measures and lay on some wealth-destroying tax burdens. But this turn away from the ice berg will be too little too late.

AJ writes:

It's all part of the cultural shift to thinking that adults, children,companies, unions, states, governments, consumers, employees, investors need to be shielded from the consequences of their actions. The celebration of victimhood is upon us. Bailouts and government medicine, are merely some of the current results of this shift in cultural ideology over the last 50 years.

Every area of society is experiencing this. Economists have responded by abandoning the moral dimension to the political and other arenas and settling for a Pareto standard in order to keep some semblence of science as the basics of economic knowledge.

Philo writes:

Saying "bailouts have to stop eventually" is not much of a contribution; it is reminiscent of "In the long run we are all dead," or "Trees do not grow to the sky." These tell us nothing about what we should do in the short run, or how much a particular tree will grow in the next year, or whether this or that institution should be bailed out now.

Bob Murphy writes:

Bryan wrote:

"Alas, in 'practical politics' almost no one's interested in figuring out whether we took the wrong course two years ago."

What if the practical politicians *were* interested in that, and dug up your Bayesian post where you said you now think the TARP reduced unemployment?

Bob Murphy writes:

Oops I should say that I have slightly mischaracterized Bryan's statement about TARP. It's here:

http://econlog.econlib.org/archives/2009/03/two_mea_culpas.html

So my point is, Bryan's present complaining that no one looks at the evidence, is a bit weird, since he himself admits that his own ex ante test of TARP "worked," meaning he had to admit that things were bad and maybe TARP averted disaster after all.

(I don't endorse his analysis; I agree with Bryan right now that TARP was bad. My point is, Bryan's own test for evidence cuts against him--but because I think he set up a silly test.)

Steve Roth writes:

Just to say, these "credit crunches" seem to be primarily, even solely, in the finance and government sectors, plus highly leveraged big business.

NFIB surveys have been saying forever, almost without exception, that credit and financing are the *very last things* on small businesses' list of constraints. Ditto Grant Thornton's surveys of privately-held businesses.

Is the crux problem, as Arnold has suggested (though not recently, I think), that the finance sector is simply too large? Like, by a factor of x or xx?

In this case, is the invisible hand responsible for a massive misallocation of resources?

If you want less of something, tax it...

Jeff writes:

Great Britain. Whatever government emerges from the election will be weak at a time when unpopular decisions need to be made, and the British sovereign debt and deficit is too big for anyone but the U.S. to bail out. They do have their own currency, so the obvious solution is a big inflation, and when the bond market vigilantes all realize this at once, they're toast.

Silas Barta writes:

The way I put it is that yes, self-destructive policies, like bailouts, must eventually exhaust their resources and end. The only question is, how much are we going to suffer in the meantime?

@Bob_Murphy: Please don't criticize others for making honest assessments of the evidence, just because someone else can bend those assessments for their own evil purposes. Yes, people will misuse your words. No, that doesn't mean you should self-censor yourself into vague, happy generalities.

Yancey Ward writes:

Bryan asks:

Who's going to be in the water when the "sink or swim" verdict finally comes in?

The answer is "all of us".

Brian Clendinen writes:

When voters punish politicians for spending and punish the freshmen when they do bail. Or when inflation sky rockets due to printing money or it gets to a point we need to default on our debt. I sure hope it is the former not the laters.

Most likely it will be excessive interest payments as % of GDP which lead to hyper inflation which leads to lack of people willing to loan, which would lead to default instead of spending decreases. I wonder if I can somehow bet on that so as to have some sort of insurance policy?

A ten to twenty year pause due to the economy picking up is not ceasing in my mind.

How about this question? When was the current bail-out cat let out of the bag. I say it was Katrina.

Joe Cushing writes:

Simple. The bail outs will end when it is the US federal government that needs bailing out.

Doc Merlin writes:

'The way I put it is that yes, self-destructive policies, like bailouts, must eventually exhaust their resources and end. The only question is, how much are we going to suffer in the meantime?'

Yes, in a bust-out, eventually, the busted firm runs out of money.

If you haven't read this paper, please do.
http://www.signallake.com/innovation/Looting1993.pdf

'GEORGE A. AKERLOF
University of California, Berkeley
PAUL M. ROMER
University of California, Berkeley
Looting: The Economic Underworld of Bankruptcy for Profit'

Troy Camplin writes:

It will all end when the one thing that actually is too big to fail finally fails: the U.S. itself. And we are well on the way.

Matthew C. writes:

It will end when gasoline is $20 a gallon one day, $30 the next week, and suddenly no one will accept the green pieces of paper anymore, for anything. They have chosen to go down this path because they are unwilling to allow the pigmen to fail, and, instead, give them billions and trillions of dollars of subsidies.

On the day the dollar dies, this beast dies, and the gravy train for government employees and banksters ends. . .

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