Bailouts and Consequences: The Vicious Cycle


The stock market is up today and forecasters are saying that we may experience a temporary upswing. Everyone is relieved. Many are saying thank God the Euros had the sense to bail out Greece.
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The question, to my mind, is what did Greece do wrong, and were corrections put in place to prevent this from happening again? The U.S. bailed out its banks, and the connected housing industries, and then we bailed out General Motors. All fixed right? The Chairman of the Federal Reserve Ben Bernanke studied the depression of the 20’s through the 40’s, and he knows what to do to prevent another financial disaster of that magnitude. We should trust him and know that we can now go on living the way we lived before with the confidence that a disaster has been averted.
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I’m reminded of the actions of my six-year old nephew when he was two-years old. My nephew loved band aids when he was two. To him, band aids were a cure all. If one of his actions resulted in the need for a band aid, he always got one. Me thinks he also enjoyed the attention he received in those moments, but he didn’t like to get hurt. He just knew that there would always be someone there with a band aid when he needed it. The band aid became a get out of jail free card to my nephew. He believed he could continue to be the wild child that he always wanted to be after a band aid had been applied. He was two years old, he didn’t understand the consequences of his actions. He didn’t understand the concept of vicious cycles, until he got hurt in a manner that no band aid could relieve. He is now a more cautious six-year old nephew in light of his experiences.
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Are we, as a people, more cautious in our endeavors now that we’ve used our band aids in the form of financial bailouts? Have we changed any of our actions? Are we more responsible in our borrowing and lending practices? Or are we addicted to band aids in the same manner as my two-year old nephew with no regard for the long term consequences of our actions? Will we eventually have to pay the price for the philosophical beliefs that we are engaging in today?
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The capitalist ideal is that some companies will fail, and that no company is too important to fail. Companies fail because they engage in unsound business practices, or they fail because they can no longer compete in the modern age. I would submit to you that part of the business model and business practice of the modern age in the auto industry involves having to deal with massive government intervention. The modern auto company also has to deal with an uncompromising auto worker’s union. GM could not compete in this atmosphere, so the U.S. government bailed them out, but they did so without changing any of the actions that led GM to require a bailout.
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We could not allow them to fail, we were told, because they were too important. (It should be noted that what needed to be bailed out more than GM was the United Auto Worker’s union, since they were not willing to yield in the face of their company’s bleak bottom line, and they are big donors to the Democrat party.) If we were to invoke the capitalist ideal in this case, we would allow GM and the UAW to fail, and another institution would take its place. The new institution could learn from the mistakes that were made and provide a greater service because of it. In other words, the capitalist ideal requires us to allow some companies (or corporations) to fail to burn the field and allow a new harvest to grow from the ashes.
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In the capitalist ideal there is a price for freedom. The price is pain. The price is failure. Every company, every country, and every group of people experiences pain and failure. Band aids won’t cure these pains. They can conceal the embarrassment for the act that led to incident, and they can provide a placebo effect on the short-term pain, but unless you correct the actions you will eventually have to pay the piper for the vicious cycle of your activity.

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