Who Benefits from Bailouts?

I always find it amusing whenever someone expresses surprise that the financial bailouts for Greece haven’t benefitted Greek citizens. “Bailout Money Goes to Greece, Only to Flow Out Again” in the New York Times is just the latest example. “The cash exodus is a small piece of a bigger puzzle over why — despite two major international bailouts — the Greek economy is in worse shape and more deeply in debt.”

Unfortunately, this is a feature of bailout, not a bug.

A plethora of financial rescues during the past decades has proven quite convincingly that this isn’t an aberration. Follow the money instead of following the headlines. That’s how you learn who profits from a bailout.

Look around the world — Japan, Sweden, Brazil, Mexico, Ireland, the U.S. and now Greece to learn who is and isn’t helped by these enormous government-backed bailouts. No, it isn’t the Greek people, nor even their banks. They never were the intended beneficiaries of the bailouts, nor were Irish citizens in that bailout. Indeed, homeowners in the U.S. were little more that incidental recipients of aid as a percentage of total rescue spending.

You probably learned the phrase “moral hazard” during the financial crisis. In short, what it means is that the bailouts rescued leveraged, reckless speculators from the results of their unwise professional folly and gave them an incentive to do it all over again. They were and the intended rescuees.

Do you think I am exaggerating? Consider the U.S. bailout in its manifold forms, from TARP to ZIRP to QE. How many bondholders suffered losses from their poor investment decisions? With the exception of holders of Lehman Brothers’ debt and a handful of banks that weren’t deemed too big to fail, just about every other bondholder was made whole, 100 cents on the dollar.

Thanks to rescue plans such as the Trouble Asset Relief Program, holders of bonds from a diverse assortment of failed and failing companies suffered literally no losses. American International Group? Zero losses. Government sponsored entities Fannie Mae and Freddie Mac? Zero losses. Banking giants Citigroup and Bank of America? Zero losses. Morgan Stanley, Merrill Lynch, Goldman Sachs, Bear Stearns? Zero losses.

Continues here: Who Really Benefits From Bailouts?




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  1. Jo commented on Jul 31

    Weekend ruined. Cheers Barry. :-)

  2. RW commented on Jul 31

    As I believe you have commented elsewhere BR these bailouts are just one of several mechanisms to socialize liabilities while privatizing profit. Lemon socialism and crony capitalism have some blurry lines but we’re probably at a point where this kind of officially sanctioned moral hazard is genuinely structural — not only legal but considered a sign of virtuous government action — so closer to what most commonly consider socialist; not simply a property of individuals but a system property; a kind of widespread moral collapse with its own supporting justification and logic.

    A case in point:

    David Brooks Is Confused, Thinks God Created Patents

    That is the implication of his column where he describes the debate over inequality as a debate “between people who think you need strong government to defeat oligarchy and those who think you need open competition.”

    Actually, his side in this debate thinks you need a strong government to enforce patent and copyright monopolies, …rules for corporate governance that essentially allow top management to set its own pay, …

    It is undoubtedly convenient for Brooks’ side to pretend that the rules put in place to redistribute income upward are simply the natural workings of the market, but it is not true. …

  3. willid3 commented on Jul 31

    well the bankers do. but then without banks the rest of crash (see Greece, had they gone with exit, which they will eventually do, and not done any preliminary work to create the new currency and set up how to deal with it at the banks, their economy collapses.

    its one of those chicken and egg deals.

    the problem is that we have allowed and they have ingrained them selves so much into governments that their needs over ride any one else s. and their needs are more what the executives need, not the business. which generally is higher stock prices. even if they crash the bank later

    • Futuredome commented on Jul 31

      Greece is not being bailed out. They are being bailed in so the eurozone stays in intact.

  4. Futuredome commented on Jul 31

    Without bailouts the capitalist system would be dead legally and maybe structurally in 1933. Capitalism died in 1933 and national govenrments could not let it go(well, who controlled them?).

    The bourgeois state tried, but its kind of individualism doesn’t work for long term stability without the state keeping it alive. Spengler was right.

  5. Joe_T. commented on Jul 31

    But if bondholders weren’t bailed out, wouldn’t that possibly undo the global pension system, resulting in large-scale direct bailouts of the weakest pension funds? And that unravelling of formerly bedrock sources of income security result in seniors’ fear and then cause major political fallout for the party in power?

    Just a narrative I always thought, but couldn’t figure out if it had any validity.


    ADMIN: No . . .

  6. Iamthe50percent commented on Jul 31

    “The phrase systemic risk is nothing more than code; what it actually means is that a politically connected banker wants the government to cover losses on bad investments.”


  7. Slash commented on Jul 31

    This is why I always regard with contempt any “conservative” type yapping about people (the poors, don’t you know) taking “responsibility” for their decisions.

    Not that people shouldn’t take responsibility for their actions.

    But people who have powerful institutions at their beck and call, ready to cushion the blow of any unwise decision whether it be financial, legal or personal, should really STFU about other people behaving responsibly.

  8. DeDude commented on Aug 1

    In the face of a bankster induced financial crisis, society face two different types of bailouts. There is the “bailout” of society from suffering a meltdown and serious depression, and then there is the bailout of the plutocrats and banksters whose reckless greed caused the crisis in the first place.

    To me there is no doubt that the banksters should be allowed to crash and burn (anything else would be moral hazard). But it is equally clear to me, that you should not subject “the people” and society to the huge loses and sufferings from a meltdown and depression.

    What happened in the US was that the two types of bailout by evil design got coupled together. The banksters basically said if you want to bail out society you will have to do it by bailing out us. They probably had some legal standing for that although (more importantly) they had a legislative lock preventing any alternatives from being implemented (the option of bailing out society and leaving banksters to crash and burn would have required new legislation). However, with Dodd-Frank in place there are no legal grey areas. Next time we can indeed save the economy and leave the banksters to crash and burn. This is why the banksters (and their sock puppets in congress) are so furiously trying to get rid of Dodd-Frank.

    Greece got the absolutely worst case scenario. The banksters and plutocrats responsible for its financial crisis were bailed out, but their society was left to crash and burn in a huge depression. The bailed out German banksters (now flush with bailout cash) are beginning the process of plundering the country of whatever valuables remains. It does’t get any more disgusting than this – oh wait – when Greece finally is allowed to go through the inevitable default, it is the taxpayers of the rest of Europe that lose money (because the banksters were bailed out by public money).

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