Libertarian Ramblings

Posts Tagged ‘bailout’

The circularity of bailout money

Posted by gravisman on January 29, 2009

I want to take a slight detour from purely libertarian thought to talk about the (il)logic of government bailout dollars from a more objective economic perspective.

Let’s start with the general thought process that leads to thinking of government spending huge amounts of money to attempt to boost the economy despite already nearly drowning itself in debt. “People are suffering, and seem likely to continue to suffer, probably even more so than they are now. Therefore we must take drastic action in the form of dramatic dollar spending totals to help the people.” Reasonable, right? Well, there’s a problem there.

The reason that thought process makes sense on the surface is that it’s easy to think of the government and the people as separate entities. We can easily imagine an analogy like two neighbors where one neighbor experiences one hard time and the other does not, and the good neighbor reaches out to help the other. Okay, fine, but the analogy is inaccurate.

Government does not have a cent of its own money. Every dollar spent by the government comes out of the collective pocket of the people, one way or another. Taxes are one way, but as we’ve seen before, taxes aren’t the only way. When we start to think about this, the circularity of bailout logic quickly emerges. The people are in danger, so the government wants to spend money to help them, but the government gets its money……from the people.

Broken down, bailout theory claims that moving money from point A to point B, and back around to point A somehow makes things better. This is the economic and financial equivalent of a perpetual motion machine. Supposedly, each time around the cycle, value is not only maintained, but somehow increased – we’re making value (money) out of thin air simply by moving it back and forth between two points.

Unfortunately, perpetual motion doesn’t work. The only thing that can happen in this scenario is that some value is bled off as we go around the circle. Some is lost through waste, some is lost as benefits to people outside the country, and certainly other means I’m not thinking of. We’re not going to create wealth simply by moving money around the circle.

There is only one way we can claim to derive benefit from this circle route. That is to claim that the real effect of the maneuver is redistribution of wealth, since we’re taking money from everyone and giving it to whom we see fit. I can attack that easily on two fronts. Firstly, as we can all easily see, money is going to huge banks and corporations, so if there is a redistribution of wealth, the benefactors are clearly not the little people – they are those who already had money to lose when this crisis occurred. Secondly, I think anyone would be hard-pressed to tell me that redistribution of wealth is ethically okay.

“Yeah, we’ve decided that some people deserve to have money taken from them, and others deserve to have it given to them without having earned it. Really, we’re just socialists, but we don’t like to talk about that.”

Okay, so I turned a little libertarian at the end there, but the main point is clear. There is a blatant circularity to bailout theory, and it cannot be a net positive on the people in the long run.


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Peter Schiff: Don’t pay your bad mortgage

Posted by gravisman on October 15, 2008

Spot on, as usual.

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A bailout would be unethical

Posted by gravisman on September 28, 2008

I’ve already posted on the logic of why a federal bailout of wall street firms is a terrible idea economically. That should seem obvious to anyone. Government management of economic matters only ever does one thing: artificially affects prices. Printing money inflates the system artificially and drives up prices of everything. Using the Fed to set low interest rates artificially drives down the price of money (more precisely, the price of debt). Purchasing insolvent “illiquid” assets drives up the prices on those assets in the sense that it keeps them from falling down to a level where the market would actually be interested in purchasing.

Artificial pressures on prices are unfair and unethical to the players in the economic system. They always result in bad investment, because goods are being traded for something other than a real market value. An accumulation of bad investment always ultimately results in an economic bubble that must burst to correct itself. That is the nature of economic systems – people must pay the price for poor investment.

Just as much as the initial government pressures that influenced and supported poor investment were unfair to the market, so too is the action of propping up that failed system with an artificial bailout. This prevents the market from draining the bubble, as needs to happen, and course-correcting so that prices and investments can return to a sound state.

In addition to all this economic logic, there is one overriding reason why bailing out ailing investment firms with federal money is completely and entirely unethical, and it has nothing to do with whether doing so will fail or succeed. The simple fact is that the mob (some people call it government) has no right to decide that it needs $3000 dollars of my money (probably more than that, but a rough estimate based on the taxes I pay and the budget for the bailout) to help some private companies that have nothing to do with me, and do this without my consent.

If the bailout plan passes congress and I attempt to withhold $3000 of my tax money, men with guns will certainly come for me and throw me in prison. That is insane! Our people must wake up and recognize that there is an ethical element to government and how it spends its money and how it takes money from the people that cannot simply be ignored. Just because we have the infrastructure in place to take money from citizens whenever we want and spend it on whatever we want does not make it right.

Government should be allowed to collect some taxes and spend them on courts, transportation, non-aggressive defense, and other matters of reasonable infrastructure. The mob cannot take my money just because it paternalistically thinks it knows how to spend it to help me better than I can spend it to help myself. That is truly insanity.

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