Bailouts for the Banks

Top Economists: Iceland Did It Right … And Everyone Else Is Doing It Wrong | ZeroHedge.

The key to understanding these bailouts is remembering that they help the bondholders, shareholders and employees of the banks to the detriment of everyone else.

These are the steps of a bank bailout:

  1. A bank’s poor lending and investment decisions lead it to go broke.
  2. None of the investors in the market want to be the last man standing on a sinking ship, so a sell-off ensues.
  3. If the sell-off leads to a market panic, then people will get nervous and demand that the government “do something.”
  4. The government intervenes with loans, extra capital and liquidity injections. These are all euphemisms for giving the banks taxpayer money.
  5. Once you start intervention, you cannot stop. Hence, the intervention continues indefinitely into the future with permanently low interest rates and cheap, no-questions-asked loans becoming part of life in the banking industry.
  6. The banks become zombies, neither vibrant, ongoing concerns nor failing entities. These zombie banks lead to a zombie economy that generally remains stagnant for years to come à la Japan.

Contrast this scenario with what happened in Iceland. These are the steps to letting the banks fail:

  1. A bank’s poor lending and investment decisions lead it to go broke.
  2. None of the investors in the market want to be the last man standing on a sinking ship, so a sell-off ensues.
  3. The government decides to let the banks fail.
  4. The country’s currency drops like a stone, markets panic, multiple institutions fail and the country enters a depression.
  5. A cheaper currency combined with the effects of getting the bad debt out of the system begin the cycle of economic growth again.
  6. New banks step in to fill the role of the failed banks.

The first scenario is what is happening in Japan (for years), the US and Europe and the second is the current situation in Iceland. Which do you prefer?

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