Recently, Secretary of the Treasury Timothy Geithner revealed that he believes that the United States economy may require yet another infusion of cash from the federal government, this time lending as much as $1.5 trillion. The logic behind this move is that the fundamentals of the United States economic system have been damaged and require repairs that will ultimately come from the one place with cash enough to enact them. This most recent suggestion that government money will cure all ills demonstrates the most basic flaw of the premise of “bailing out” an industry: once you begin doing it, it is difficult to stop.
Each bailout thus far countenanced by the federal government has been established to meet an onrushing crisis. The Bear Stearns shotgun wedding to J.P. Morgan (already nearly a year in the rear view mirror) was meant to forestall a devastating run on the nation’s investment system and to prevent a massive, unforeseen credit crisis. While effective in the short run in preventing an out and out panic, clearly it has not kept the nation out of a massive economic downturn. The major concern with the government involvement in the Bear Stearns crisis — in which it extended a great deal of credit to the failing investment banking firm — was that such involvement would destroy the moral hazard born by companies in a competitive industry — that they would lose the incentive not to fail because the government would back them up financially. The “Too Big to Fail” premise has extended further, with government money being doled out to insurance giant AIG, the “Big Three” automakers, and others by the billion. The larger the company, the more likely it is to get money if it finds itself on shaky financial footing. The desire to save jobs and restore the financial industry, while noble in and of itself, seems to be leading the government on a wild goose chase, when each request for money is followed by another. It feels like the equivalent of pouring money into a hole, as the continuously plummeting stock market seems unrestrained by the cash thrown into the various industries or the pockets of consumers.
Fundamentally, the issue is one of short-term vision. Government officials, given only brief elected terms, seek to do what will make their constituents happiest within those windows so that they may return to office two, four, or six years down the line. But at what cost? Short term spending may avert crises temporarily, but they cannot dull the effects, and may indeed exacerbate them down the road by consuming resources that might best be used elsewhere. Each request for money makes sense to someone trying to protect the jobs and welfare of constituents. And it certainly seems heartless to watch jobs float away without stepping in. But none of the measures thus far adopted seem to have had any effect on the worsening economy. The argument might be made that the “stimulus” bill signed only recently has not been given time to be properly absorbed into the economic mainstream. But the continued negative trend within the market suggests that investors have low levels of confidence in its ability to reverse the trend or to increase consumption to the degree necessary to avert continued decline. The infusions of government money reek of artificiality and do not seem to be having any effect in slowing the crisis.
The other issue is simply a lack of knowledge. The enormous complexity of the global economy makes it impossible for anyone to accurately predict its behavior. Any number of factors can play havoc with markets in a scenario remarkably similar to the butterfly effect, in which a butterfly flapping its wings on one side of an ocean causes a tidal wave on the other side. This jumble of markets and money, with so many different influences, argues against any one man, or one group of men, being able to accurately predict the result of money being inserted into the economy. The efficiency of world markets also argues against any government money being applied in time to adequately correct the problem for which it was destined.
What then should we do? Geithner is correct in arguing that there has been significant damage done to our economic system — the Dow Jones Industrial Average recently reached its lowest point in over a decade. But panicked dollars stuffed into the holes are not the answer. The solution will take time, and will in all likelihood come as a result of a fundamental restructuring of the credit industry as lenders take a closer look at the loans they make and at the security they receive for their money. The government needs to check itself in its willingness to dole out money to those in troubled straits and realize that sometimes time is the best answer to these problems.
Robby Colby’s column appears Thursdays in The Cavalier Daily. He can be reached at r.colby@cavalierdaily.com.
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