Tuesday, February 9, 2010

More bailouts ahead

This time it's not Wall Street necessarily, but countries, with Greece apparently being first in line for a bailout. Writes John Rubino:
With a bail-out of Greece apparently immanent and everyone drawing parallels between the PIGS countries [Portugal, Italy, Greece, and Spain] and the Wall Street firms that nearly cratered the global economy in 2008, this might be a good time to ask why each year seems to bring a new set of financial basket cases requiring taxpayer cash.

The answer, of course, is easy money. When governments create too much credit, borrowing gets easier at the margins and the less intelligent, moral, and wise end up borrowing far more than they would normally be able to. When they inevitably implode, the world gets another chance to behave rationally by letting them go, accepting the resulting short-term pain, and learning the relevant lessons. But beginning in the 1990s with the Mexican and Russian defaults and the self-destruction of Long Term Capital Management, the strong economies have chosen to avoid the pain and bail out the losers.
He concludes his article this way:
When the bond or currency markets say no more, the party will end. Then we’ll see who’s really too big to fail.

No comments: