Tuesday, September 23, 2008

Model For U.S. Bailout: One Good, One Bad

Believe it or not, this is not the first major financial bailout in recent history. There have been previous bailouts, and there will be future ones as well, thanks to the nature of boom and bust cycles. So the U.S. has a couple different models to look at when considering how to approach its own bailout; one in particular was substantially more effective than others have been. Probably the two closest comparisons to the current U.S. financial predicament are Sweden and Japan. Sweden faced a near financial collapse in the early 1990s, and Japan experienced the lost decade lasting the entire 1990s.

The difference between these two examples is that Sweden’s economic struggles only lasted a couple years, while Japan’s kept going and going. To this day they have yet to fully recover. Carter Dougherty, a writer for the International Herald Tribune thinks the U.S. could look at how Sweden orchestrated their bailout and learn from it. One of the biggest things that Sweden did in their bailout was to make sure to drain every penny from shareholders before offering any money. In addition, they also took major stakes in these institutions. This not only allowed the government to recapture some of their investment, but it also made the plan acceptable in the eyes of the public. The current U.S. bailout plan is a hard pill to swallow for U.S. taxpayers because it doesn’t do enough to penalize the people who got us into the mess in the first place.

Over in Japan during the '90s there were a whole bunch of policy blunders that are almost legendary now, as is the result: more than a decade of zero growth. The U.S. surely doesn’t want to replicate what happened in Japan, which is one of the reasons the Fed has been proactive in response to the current crisis. It is hard to compare our two different economies, but you can rest assured that U.S. policy makers looked closely at what happened in Japan when they were deciding on the best course of action.

Again, it is hard to compare the U.S. economy to any other economy in the world--if for no other reason than its sheer size--but at the same time it should be helpful to look at what has worked and what hasn’t worked in the past to help formulate the solution to secure our future. I’ve repeatedly said on this blog that I’m not a fan of bailouts, and that will always be the case. My ideology is that we should address the problem at its source and create a system that will prevent--or at least limit--the problem from happening again in the future. Bailing out the institutions that caused the problem is certainly not going to accomplish that result. I also acknowledge that because of the current state of affairs, we are left with little other choice, but we can make sure that we do this thing the right way. I like how Sweden did their bailout because it inflicted pain on the companies and their shareholders. This at least will make companies think twice in the future about taking on undue risk.

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