Dec. 2, 2008

Bailout May Be Misunderstood but Must Not Be Misused

The trillions of dollars in various "bailout" and stimulation initiatives are not intended to bail out wrong-headed investors or executives. In the case of Bear Stearns, notwithstanding the "bailout," shareholders still lost 90% of their investment. It is true that some lousy executives got away with undeserved golden handshakes and I agree this is wrong. Avoiding moral hazard, however, requires placing responsibility where it is due, and that means holding the decision makers responsible and accountable for their mistakes. I had been disappointed with the decision of Paulson not to "bail out" Lehman Brothers on that fateful September weekend, and that is not because I wanted Paulson to bail out the wrong-headed decision makers who brought Lehman to its knees. I was wary of the effects of the fallout of the bankruptcy of Lehman on innocent people, and events that unfolded proved me right.It is easy to say that we should let businesses fail if they cannot survive on their own. But policy makers have to worry about the chain effects each business failure brings about. If the cost of a business failure proves bigger than the cost of a "bailout," the bailout makes sense. I must repeat: such "bailout" is not intended and should not be misused to bail out or reward wrong-headed executives. The latter should still be held accountable.Some commentators say that Americans need to save more. I said that more than ten years ago. Exactly because this is so important, we need to spend the trillions of dollars of "bailout" money. If they helped save jobs, Americans will then have the income from which they can save. Without jobs, Americans cannot save.Some commentators also are "sure" hyperinflation is inevitable. I can assure them that hyperinflation is not going to happen. Hyperinflation is always caused by too much spending. During all episodes of hyperinflation such excessive spending is indeed financed by the printing of money. But printing money in itself does not imply excessive spending. Right now any printing of money earmarked for "bailout" or "stimulation" serves only to make up for inadequate spending. Because anemic spending is going to continue for quite a while because of the collapse in asset prices worldwide, how can hyperinflation take place?Finally, some commentators worry that the "bailout" money will create another bubble. Again, the various bailout packages serve only to fight deflation and to re-establish full employment. Can anyone find any sign that a bubble is forming because of a bailout?

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