Bailouts and Funny Money

Patrick Gibbons

Many newspaper editorial boards and supposed pundits across the country are busy blaming the mythical, supposedly laissez-faire and deregulated free market for our financial system's current disaster. They should blame the government for the economic crisis – if they weren't too busy trying to point the finger at our (highly regulated) "free" market everytime something bad happens.

But if we did live under a free economy, the meltdown would not really be problematic. It would actually be welcome.  Think about it: When a company, operating freely, cannot sustain its profitability, it is literally destroying wealth. That company needs to fail so that the resources it is employing in destroying wealth can be used by another company to create wealth. In a truly free-market economy, an economic downturn is the market's way of reorganizing resources so they are returned to the production of wealth and the enrichment of our lives.

This will happen in any economy – unless the government steps in.

Contrary to popular editorial belief, the government's proposed $700 billion bailout won't work – just as all the so-called "liquidity" injections before it also failed.

Today's catch-phrase is that a bailout is cheaper than the cost of doing nothing. But think about it:  Where does the bailout money come from?  Well, the government can pay for the bailout in one of three ways: spend tax revenue, borrow or print money. Not only do they ALL keep bad businesses afloat, each approach has its own problems.  Let's examine each option.


  • Spend tax revenue: To do this, the government could raise taxes (i.e., take money away from taxpayers and make life harder on them) or take money away from existing government programs. If a bailout were absolutely necessary, the best solution would be to shift current revenues from existing programs to cover the bailout. Unfortunately, you would hear loud wails from the Left as "essential" programs are cut.


  • Borrow: The government borrows money by going into the money market and essentially removing money that the private sector can borrow. By removing money the private sector would use for corporate investment, the government would slow even further the economy's ability to right itself and reform the busted mortgage/housing/lending/insurance industry. Yes, lending practices are strict right now, so it is difficult for private sector borrowing. But this is good. It means sound investments are more likely to be made.


  • Print money: When the government prints more money, all it really does is inject a greater number of dollars into the marketplace to chase the same number of goods. This is a direct attack on everyone who attempts to save. Thus inflation historically has been a notorious killer of wealth, and especially so for the middle and lower classes. As with counterfeiters, the only individuals who profit from funny money are those who get to spend it first – before its adulterating effects have spread through the whole economy and are reflected in prices.

I wonder which method the government will ultimately choose. But make no mistake: Each choice has a serious consequence and would slow our economic recovery.

I'm not arguing that doing nothing would be painless. In fact, letting the invisible hand of the market reorganize our economy will be very painful in the short run. But at least it would be only in the short run.