Wednesday, October 15, 2008

The Bailout Won't Work

The bank bailout won't prevent a deep recession or depression. That is being driven by the bubbles breaking and the malinvestments being liquidated. That process will continue on. A money infusion into banks won't reverse it or undo it or stop it. For one thing, the malinvestments accrued over many years, and their amount is vastly greater than even this bailout bill. For another thing, the banks cannot "re-do" or prop up all those same investment projects gone bad. At best they will make new loans, and they will be reluctant even to do that because the liquidations going on create a bad investment environment. Wealth losses are large, growing, and uncertain, and banks will not be anxious to make new loans in such a situation. If the banks do extend loans to real estate and other areas in order to prop them up and not allow them to decline in price, then it is setting these markets up for another mini-bubble and crash.

The bailout involves either ordinary taxes or inflation and its tax. This is bound to divert capital from other productive uses into a futile attempt to prop up markets that are in decline and have declining prices. Who will be buying the products of these markets? Who will be buying the condos and malls and expensive homes? Do Bush and Paulson expect everyone to incur even more debt in order to buy and hold their prices up? This cannot work. The more capital that is diverted into holding up failing markets, the longer and deeper the depression will be. Hence, the bailout will make matters worse. The stock market rally on news of nationalizing the banks is misguided. The odds are that it will peter out and we will see lower prices down the road.

The bailout "will generate even greater problems down the line."

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