Who’s Going to Bail Out the Bailout?

Two weeks ago, European ministers approved a €100 billion ($126 billion) financial injection to resuscitate failing Spanish banks. With a 24.4 percent unemployment rate, the country was idle, restless, and agitated: a lethal combination that spells either adolescence or bailout. 100 billion euros later, the storm has cleared and the only progress Spain has made is in making it to the finals of the European Soccer Championship.
$126 billion might sound like chump change to Americans, but this is the equivalent of a $1.6 trillion bailout in the U.S. (in terms of bailout to GDP).
Spain is now developing an allergic reaction to the medicine it cried out for.  The bailout increased concern over public debt, putting federal bonds in jeopardy and adding to Spain’s ongoing recession.
So what is Spain’s solution? Why, more bailout of course. This time, however, Spain is not even specifying just how much they will need or the conditions attached to the loan. Economists realized the folly in explicitly asking for ludicrous sums of money.  Now they’re asking for indefinite sums of money.
If any of this sounds familiar, it should. Before you knew who Snooki was, a similar phenomenon was going on in the U.S. The government bailed out failing banks. Four years later, unemployment remains high but the former CEOs of Citigroup, Merril Lynch, and AIG are still securely employed as prominent corporate officials. Also, Snooki is pregnant.
Here’s the key point; the reason for bailout failure is the same as for bank failure: lack of accountability. The bailout failed, but the idea was somehow resuscitated. Banks fail, but keep getting resuscitated. If a bank fails, it failed because it is a failure. If a bailout fails, it failed because it is a failure.
Economists like Paul Krugman and Larry Summers argue there were other systemic flaws or problems with the execution of the bailout. They argue had we not bailed out the banks, there would be worse damage: a fair point if you think only in the short term. They do not fully address the inherent problems with the bailout. Namely, the bailout is a failed idea, not a failed experiment. This is not just moral hazard anymore. The credit score of American banks factors in the likelihood of a government bailout. This is moral disaster.
Krugman and Summers are good Keynesians and good Keynesians, like good politicians, neglect the long term. Because of the bailout, banks will keep making mistakes without incurring the consequences. These economists, like good politicians, are also good at deflecting blame. The bailout is not being blamed for failing to resolve poor banking practice. Bank bailouts keep failing but the practice lives on. The trouble with bailouts is you can’t start a nonstarter but you can’t stop it either.
What about the bystanders, the collateral damage? One cannot help but pity the poor clients of these banks. However, these bailouts do more than compensate their clients for their losses. These are banks alive, well, and, worst of all, gaining new customers every day.
American banks failed because of imprudent lending, relying on a housing bubble, and hiding behind complex derivatives. The Spanish banks started becoming an issue of concern when bad real estate investments went south. These were risks and there should be consequences.
The failing banks were bailed out. The failing bailout is itself being bailed out. It is highly hubristic to think oneself immune from Newton’s third law of motion; for every action there is an equal and opposite reaction. Actions must have consequences. There must be accountability in our accounts and responsibility in our response.
Photo Credit: anotherangryvoice.blogspot.com