Bailout Blues

Apparently the economy is getting itself stuck in the approaching quagmire of a recession. "Bad News" in the business column on Google news is occurring with depressing regularity. Among all of this bad news is the repeated buzz of bailouts. Here's the question: is this a bad thing or a necessary thing?

First of all, why are we in this mess in the first place. One school of economic thought called Austrian Economics (so called because many of the founders of this school of economic thought originated from Austria) suggests that economic recessions are caused by the government expanding the money supply. According to Austrian Economics, money, like everything else, is subject to the universal laws of supply and demand.

For an example of supply and demand think about cars. Almost everyone wants a car and therefore cars are subject to high DEMAND. Now, if only 100 cars were produced in Canada every year, the SUPPLY of cars would be very tight. Here, the law of supply and demand dictates that cars are going to become very expensive. Conversely, if the supply of cars was to dramatically increase to say 30 million new cars per year and the demand were to remain roughly the same, the price of cars would plummet.

Money is no different. If there is little or less money in circulation, the purchasing power of that money: what you can buy with it , will be higher than if say there were to be lots of money in circulation. If however there is an influx in the amount of money in the economy, the purchasing power of each individual dollar will decrease and things will simply cost more. This is inflation.


Let's say that the government wanted to stimulate the economy by starting up the printing press and pressing enough money to pump 50 billion dollars into the economy. Would we all be richer? No. Here is why. The first people to get hold and spend the new money will at first be greatly benefited. Prices will still be at or close to the same level as they were before the new money was created. However, as the new money starts trickling down through the economy, prices will begin to increase in response to the increase in the money supply. The people at the end of the money train would not get near as much bang for their buck. They are going to end up getting devalued money for their goods and services and are going to be forced to pay newly inflated prices. Sounds a lot like a pyramid scheme where the last people in are the losers, doesn't it? In addition, the purchasing power of their pre-exisitng money would be dropped, effectively devaluing their savings.

Moreover, all this newly spent money would cause a rash of spending and investing that would not have taken place in the market if the government had not printed the money in the first place. This new money can create wonky investments and distorts the market process. The housing bubble is a good example of newly created money causing an excess on the marketplace.
Once the government stops printing money and jacks up interest rates . The bubble pops and we start to head towards a depression, just like we are now.

Some would argue that going into a recession is a necessary and healthy correction in the free market. A recession will help to liquidate bad investments and reallocate resources (capital etc.) to market directed areas of the economy.

Arguably bailing out companies that have made bad investments only serves to perpetuate bad investments and trap capital in inefficient venues. Capital that needs to be going elsewhere. At the same time these massive bailout programs saddle taxpayers with the load of paying off the mistakes of politicians and corporations. Whether this comes in the form of taxes: the direct siphoning of your wealth, inflation: the stealthy, invisible tax through the devaluation of your savings , or debt: the attack on the future produced wealth years down the road.

Oh, but if we don't save these companies many people will lose their jobs and the economy will be hurt, the proponents of financial bailouts might say. So what. I realize losing one's job is a horrible thing. However this is a normal market mechanism - a necessary market function. This also assumes that the laid of worker will not be able to find a another job.

This should be all the more reason to let the economy correct itself via a recession. We desperately need to get back on the real track towards peace and prosperity. Not worsen the severity of our situation by repeating actions that got us into the mess in the first place.

Lastly, many people would love to blame this on capitalism and free markets. However people are confusing the cause of this whole crisis. Irresponsible fiscal responsibility lands the blame right between the eyes of government, not on the markets.

Rather than begging for corporate welfare, corporations and individuals should be condemning mis-lead government policy and calling for change.

Let's say no to financial bailouts and corporate welfare. Lets say no to big government.