Bailouts - past and present
I can just see the argument. Congress is upset that good American taxpayer money is going to rebuild Germany.
The conservative press argue about Moral Hazard. If countries elect dictators and then try to take the world over by force and exterminate minority races there is no loss to them if you rebuild. We shouldn’t rebuild them – better leave them a smouldering ruin and lay waste Europe because otherwise we would have moral hazard.
And so the Marshall Plan died.
Fortunately it didn’t happen that way. Europe was rebuilt and the world wound up a safer place.
And so I make a plea to the world. Please dump this bailouts are a bad idea thing.
Some bailouts turn out to have been a very good idea – some are suspect. The bailout of Mexico didn’t wind up costing the taxpayer very much – and was better than the alternative – a complete social debacle on a country that last I looked shared a long border with the United States.
The Norwegian bank bail-out of 1992 cost the shareholders a pretty-penny (they lost everything). But the Norwegian economy bounced quite rapidly and the Government actually made a profit.
By contrast the first bailout of S&Ls in the early 80s set up a much larger debacle in the late 1980s (see my history of US Finance paper).
What is really required is not a blanket rule against bailouts – or a blanket rule for them – but – what is in my favourite phrase of the day “constructive ambiguity”. Oh, and sacking the management of said institution for cause and denying all the golden handshakes etc. Suing Dick Fuld would be a start too.
John Hempton