TeeJaw Blog

Iceland Wins The Bank Bailout Scheme — By Default

Posted in Economic Theory, Government and Politics by TeeJaw on Thursday, June 16, 2011, 10: 07 AM

Trying to convince anyone that the bank bailout was a dumb idea, that it would have been better and wiser to have let the stricken banks fail, is a doubtful undertaking. The accepted wisdom is that they were “too big to fail” or “we could not have let those banks collapse.” Reasoned explanations are seldom offered in support of those conclusions, it being assumed no serious person could disagree. John McCain suspended his campaign and ended his presidential prospects for this nonsense. In late September of 2008 the House Republicans resisted, but gave in mere days later on October 3, 2008 under the heavy weight of what they wrongly perceived to be universal public opinion. The country was fed the ridiculous line that the whole financial system was on the brink of collapse and that passing a massive bank bailout was a dire emergency.

A little history is in order. The Emergency Economic Stabilization Act of 2008 was supposed to solve the subprime mortgage “crisis” [never let a good crisis go to waste] and to start banks lending again. Republicans in the House did what their conservative base of voters elected them to do and refused to approve this $700 Billion giveaway on September 29, 2008. The Senate, with presidential hopeful John McCain hogging all the spotlight he could garner, passed a revised version that added an additional $150 Billion to the original $700 Billion and increased the number of pages to 451, more than anyone could possibly read under the fire-drill frenzy that prevailed, and the House easily passed it on October 3, 2008. George W. Bush signed it into law within hours. Thus, the Troubled Asset Relief Program (TARP) was created to stuff $850 Billion dollars of hard-earned taxpayer money down a rat hole where the greedy rats were anxiously waiting. [To be fair some, such as Wells Fargo, were not greedy at all and tried to refuse the money but were forced to take it. Those are the ones who have paid it back.]

Immediately there were predictions that it would not work. Banks would not start lending again, the subprime mortgage mess would not be fixed, the whole thing was being financed by ever more debt, and any short term gains would be badly offset by long term economic harm. All of that and more has proved true.

Looking at the bank bailout for what it really was makes the case against it. Nationalization of private debt can never lead to anything good. Doing it with even more debt, as here, is worse than ordinary nonsense. It’s nonsense on stilts. The taxpayers that pick up the cost, now and in the future, have their wealth confiscated for folly. The recipients of the bailout escape one of the most important corrective mechanisms of a free market — leaving the ones who acted poorly to suffer the consequences of their own mistakes. Since they cannot be expected to willingly share their profits with us when they succeed they should not believe taxpayers will come to their rescue when they fail. Bailouts beget more bailouts as the players take unreasonable risks believing there will be a safety net to catch them when they fall.

It must be thought that when a bank or a company goes broke something dies and is gone forever, leaving a net loss in the economy. But that’s not at all what happens. The business of the failed enterprise is taken up by others who might run it more wisely and profitably than the old owners did. That new endeavor will create new wealth and new employment for job seekers. This new birth of economic activity and wealth creation is lost when the government confiscates money from those who earned it legitimately and gives to those who squandered their own assets, and will further squandered the loot taken from more productive citizens. Dipping water from one end of a swimming pool and pouring into the other end does not raise the water level. Nor does it remove any impurities.

The beneficiaries of the bailouts are mainly the politicians and bureaucrats who administer vast amounts of public money to be handed out to selected players, make that “cronies”, in the private sector and lesser government entities. These transfers become a sort of money laundering scheme where public money is used to buy votes and favors, with some of the money tracing its way back in the form of political contributions to the political fat cats giving it out.

There is more than money in bailouts for politicians. There is the opportunity to gain control over more segments of the private sector. Control is always a highly sought prize in human nature and can even exceed the drive for money. Money is not desired for its own sake as much as for the control that it bestows on he who controls its flow.

When the U.S. embarked on its foolish bailout of private banks most European nations followed suit with their own bank bailouts, proving that “dumb ideas can proliferate” said Jeff Carter at the Points and Figures blog, a site devoted to “an irreverent look at economics, finance, trading and politics.” That subtitle highly recommends Mr. Carter’s writings.

In Iceland: What We Should Have Done Mr. Carter noted:

Iceland didn’t rescue its banks. It couldn’t afford to do it. So, they went bust. Iceland looked like it was going down a path of permanent financial armageddon. However, Iceland is in better financial shape than the rest of Europe today.

It hasn’t ended yet. Further harm is being inflicted on the U.S. economy by the Federal Reserve and its chairman, Ben Bernanke. We have only recently learned where much of the QE2 money has gone. It has been given to foreign banks. Lord help us.

Further Reading:

Finally,The True Story of the Financial Meltdown Breaks Through

Assigning Blame For The 2007-2008 Economic Meltdown

Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon

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