Why Government Bail Outs Don’t Work

It always strikes me as odd that companies or certain people need bail outs from a government when they get into really hot water. Why do we collective think these actions are good for us when in reality it means a higher tax burden down the road for everyone?

You see bail outs usually imply unusual times where government money isn’t sitting around in surplus. So in order to bail out a company or group of people the money has to come from somewhere. Normally the budget doesn’t have a rainy day fund to pull on so the government has to issue more debt to pay for the bailout. Hence down the road all of us are collectively paying interest (at the very least) on that bail out money.

So it strikes me that the US government’s economic stimulus cheques are really like a person up to the eyeballs in debt using a credit card to try to get out of it. The cheques don’t make any sense that I can figure out. It doesn’t create more money and if the economy is going to hell likely people will pay down their debts. So in effect the government has just shifting credit card debt and mortgage debt to the national debt. You still have to pay it off, but now your spreading the debt over everyone rather than just those who made the mess.

Perhaps a better idea is the government to examine who it got into this mess in the first place.  Have their polices been causing a more unstable system?  Did the cheap interest rates post 9-11 just push off the recession they were going to then until now?  Or perhaps this won’t work as who in a government can be that objective to really see the forest from the trees?

In the end, I’m not a fan of bailouts.  Regardless of the ship, if it is sinking, there is often a good reason why.

7 thoughts on “Why Government Bail Outs Don’t Work”

  1. There’s a small chance it will help change people’s opinions of the economy, which could turn it around. The economy can be affected by the number of transactions even when the amount of money available stays the same.

    It’s like inflation – if people think it’s high they’ll start raising prices, driving it higher. So the government sometimes has to make sure everyone believes that it won’t let inflation get that high to make sure that it doesn’t have to take action. Not very clear, but we are talking about the government 🙂

    Bailouts don’t always work but they usually seem to be sold as a way to avoid panic and more of the same problem.

  2. Some times small evils are necessary to save a bigger disaster. While I don’t like bailouts, market forces get out of hand (naked short selling) and need to be controlled.

  3. Hear, hear!

    God forbid people actually take responsibility for their lives.

    I have been wondering lately if the U.S. government should let one bank go under without helping. Wall Street are the biggest capitalist during good times and the biggest socialist once they get themselves in trouble.

  4. The intent of the stimulus package is to soften the decline of the economy. It’s heading for a recession either way, but the hope is that with the cheques it’ll be a bit more drawn out and less immediately painful.

    Of course, as you say, you have to pay for it in the end… and I don’t think this recession is going to end with an economic boom this time… more like deep recession, long period of stagnation, slow growth. This is going to spread globally in the coming few quarters. Put your seatbelts on.

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