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You arguments make sense. What would you say to those who support bailouts and their logic, which if I understand correctly, is as follows: if you dont bailout
by raheemm 17y ago
You arguments make sense. What would you say to those who support bailouts and their logic, which if I understand correctly, is as follows:
if you dont bailout Greece, then the markets will get nervous about other bigger economies with debt (Spain, Ireland, etc) and call in the debt to these countries as well. Many of these countries are likely to default, which in turn would lead to more panic and more debt being called in, leading to a repeat of the financial crisis of 2008 (ignited by the bankruptcy of Lehman), where banks trust no one, every debt obligation is called on immediately, and everyone hordes cash out of panic. A vicious cycle like the great depression develops and even relatively healthy economies, banks and companies go bankrupt.
Then what? Yes, this process does weed out the weak banks/companies/economies. But it also destroys everything else, including social and political institutions and the worse case scenario is you have global anarchy, unrest, wars etc, etc.
I think moral hazard is important. But is it so important that we destroy the whole system? There must be a more balanced approach, but not sure what that should be.
- dsplittgerber 17y agoYou make a lot of assumptions that are not necessarily true. Markets didn't collapse (went down 4% I guess) after Lehman went bankrupt and Lehman was at no point of systemic importance, which crucially, lots of proponents of bail-outs made it out to be. Some market players believed so, but it turned out to be wrong - people tend to overestimate such things because you cannot disprove them. This is exactly the same reason Greece should not be bailed out. Not every debt obligation is going to be called on immediately because lots of players are going to look for a save haven for their money, there will be contrarians etc. Lehman showed us that the whole melt-down scenario is probably (no one can be sure) overblown. And considering the social costs of moral hazard, one can make an equally valid argument, that it's no one's business to bail out any private enterprise or country.
- raheemm 17y ago"You make a lot of assumptions that are not necessarily true." These assumptions were made by leading economists and bankers(Ben Bernanke, Gov of Bank of England, Treasury sec, etc) and they are also based on direct experience from the great depression, the Asian financial crash/contagion of the 90s, etc. "people tend to overestimate such things because you cannot disprove them." The problem is that during a financial panic, you cannot make reasonable estimations. History shows financial panics to be very, very destructive. And in our highly interdependent economies, a financial panic is far more destructive than previous times. The most effective way to deal with financial panics seems to be bailouts. We may not like it, and rightly so. But what choice is there?
- deleted 17y ago[deleted]