What Happens When Bailouts No Longer Work?

What Happens When Bailouts No Longer Work?
What Happens When Bailouts No Longer Work?

The dynamics of postmodern economics defies the logic of times past. Everyone use to know that there is no such thing as a free lunch and that flawed financial acts always have consequences. Common sense dictates that national economies should function like home economies. People should not spend more than they make or take unreasonable risks. Everyone should always save for a rainy day.

However, these simple rules no longer seem to apply. Especially in these times of the coronavirus crisis, economists allow everything. Suddenly, everything is free—stimulus checks, benefits, paycheck loans and medical care. The government can spend with reckless abandon. Trillions of dollars of debt are approved without much fanfare. The business world follows suit with its dependence upon cheap money and government largess.

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All these trends also translate into personal finances. So many people have embraced debt and entitlements as a way of life.  When things get rough, people go to the government to rescue them from disaster.

Perhaps the worst of it is that there seem to be no consequences. The sky does not fall down. Things seem to keep on functioning as if nothing drastic has happened. People seem to keep living happily ever after until the next crisis strikes.

The Need for Constant Rescue 

On the surface, postmodern economics seems as bizarre and irrational as the philosophy of postmodernity. However, the constant recourse to the government for stimuli, aid and free money does have consequences. As things worsen with the present multiple crises, the frayed edges of a defective financial system are showing.

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The rescues still work, but there are signs of trouble. The gradual consequences of a bailout economy are showing in the form of low growth and productivity. It now takes more kick to kick start the economy. Government rescues depress markets and discourage entrepreneurship. Indeed, massive government interventions of any kind are dangerous and necessarily lead to socialism.

Rescues Become Automatic

Massive government intervention is dangerous because it is habit-forming. Once a government indulges in printing money to deal with disasters and crashes, there is no crisis too big or small that will not serve as a pretext for printing more. Indeed, the print reflex becomes almost automatic, and the amount of money grows exponentially with each new adventure.

These automatic rescues create habits of dependency that are hard to break. These habits, in turn, generate others. Economists become accustomed to a distorted vision of the economy. Business leaders, gorged with cheap money, are tempted with moral hazard, developing insensitivity to risk-taking, since they are not expected to pay for bad outcomes. Consumers come to expect the comfort of generous bailouts that soften the impact of financial failures and crashes. People live in the shadow of a cruise-ship-like economy where everything seems to work out fine.

The resulting unhealthy situation creates a fragile and vulnerable economic system that must constantly be rescued with easy credit, tax benefits and bailout funds.

The Fed’s Arsenal

What makes the rescues dangerous is a vast arsenal of money-extending weapons deployed by the Federal Reserve. The arsenal makes possible the array of extremely generous unemployment benefits, forgivable paycheck loans and direct cash payments that have cushioned the fall from financial stability.

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The Federal Reserve is cutting interest rates to almost nothing to get money running through the economy. It is expanding the money supply and incurring new debt.  For the first time, the regulatory body is directly buying up corporate bonds to calm markets. It is acquiring these assets at twice the rate of the 2008-era practice of “quantitative easing” that allowed the Fed to buy up tens of billions of dollars of troubled assets a day for the same purpose.

Indeed, the government battle plan has resulted in the strategy that has all but made money free to borrowers with near-zero interest rates. What makes matters worse is that other nations are following similar plans. Worldwide, the notion of free money allows governments and businesses to borrow their way out of any problem . . . and create new ones.

The Rise of the Giants and Zombies

Massive rescues and free money have three dangerous effects on America’s business culture. The first is that it allows gigantic companies to thrive. Free money helps the big firms get bigger by making it easier to expand. These firms also are best positioned to deal with the strings of countless government regulations tied to free money. They profit from the government recovery programs that need the services and resources of giant firms. If deemed “too big to fail,” troubled giants can count on even more direct government aid.

Rescues also favor inefficient, heavily indebted smaller firms who use free money to stay alive artificially. Economists call them “zombie” firms since they use up credit resources at the expense of hyper-efficient startups that normally make economies dynamic with their innovation. The zombies make no profits yet absorb productive workers, crowd out resources and drive up costs.

This clogging up of the economy with deadwood makes it less productive. The inefficient use of free money has the effect of juicing up the market and thus inflating the value of bonds, stocks and other assets that artificially increase the wealth (on paper) of their owners.

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The result of a government-rescue culture is not the flowering of capitalism but its opposite. As Ruchir Shama writes in his Wall Street Journal Review Essay (Jul. 25–26, 2020), “the irony is that the rising culture of government dependence is, in fact, a form of socialism—for the rich and powerful.”

In other words, Western economies may be outwardly capitalist but now run on socialist models engineered by powerful technocrats that protect gigantic companies and keep inefficient firms alive.

More Rescues Means Bigger Bailouts

The long-term consequence of this faulty model is the ballooning of global debt. Free money may be free to borrow, but the principal must always be paid back. Borrowing against the future may soften the damages caused by economic crises, but it weakens productivity, slows growth and clogs up the system with its zombies. Increasing the number of unproductive borrowers means it takes more debt to impact ever longer and weaker economic recoveries.

The coronavirus crisis, race riots and economic shutdown created a perfect storm that hampers a return to order and normality. Economists realize that it will take successive relief packages measured in trillions of dollars to fix the harm done to the world economic system. Thus, governments are intervening and borrowing on a scale never seen before.

This perspective begs the question no one dares to ask: What will happen when the bailouts no longer work? With everything in a state of emergency, everyone feels dispensed from asking the question. However, people do not realize that the arsenal is emptying of weapons old or new. There will be nothing with which to restart the economic engine. The risk that the West’s financial system will come crashing down is alarmingly high.

No Longer an Economic Problem

When and if the coronavirus crisis ends, many suggest that there will be time for governments to move out of rescue mode return to sound economics. However, this is easier said than done. Such logical advice does not seem to apply to a bizarre postmodern world that has embraced the absurd.

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The way out of this mess is not found in a policy change. This is no longer a financial or economic problem. It is a moral problem deep in the hearts of postmodern men. In the frenetic intemperance of unbridled passions, people have adopted vices and lifestyles that know no restraint. They resent any sufferings or hardships that come their way. They push off for the distant future all obligations, responsibilities and duties that should be taken care of now.

The present state of the economy reflects these grave moral disorders. Morality and economics are now so intertwined that one cannot be considered without the other. To think otherwise is an illusion. A return to order is possible, but only when there is a return to moral law and God, for whom all things are possible.