Bailouts Destabilize the Economy and Inflate Asset Prices

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by Peter Schiff, Schiff Gold:

President Trump recently signed a $2 trillion stimulus bill, ostensibly to support the economy through the coronavirus crisis. Pundits hailed it as a great bipartisan accomplishment that will help ease the pain of this economic slowdown. Of course, there will still be pain. And the government stimulus may actually cause more pain than it eases in the long run.

As with all politically motivated policies, everybody will focus on what is seen – the immediate impacts of the stimulus. Airlines will be “saved.” Workers will get checks. But nobody will pay any attention to the unseen, and that’s where the pain comes in.

In an article originally published at the Mises Wire, economist William Anderson explains how bailouts destabilize the economy and create artificial asset bubbles – the exact problems that set the stage for the current economic meltdown. Keep in mind, it isn’t about the coronavirus. COVID-19 was just the pin that pricked the bubble.

The following article by William Anderson was originally published at the Mises Wire. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

In the end, after all of the political posturing and all of the speeches and exhortations for Congress to “do something,” a $2 trillion “coronavirus stimulus” bill landed on the president’s desk for The Donald to sign. And sign he did, uttering all of the platitudes and everything else that comes with “historic” spending legislation that never should have seen the light of day. Although COVID-19 has helped expose vast weaknesses in public health systems in the USA, it also has shown that with much of corporate America, the emperor has no clothes.

Although tracking where the money goes is not an easy thing, we do know that the airlines will receive about $50 billion in cash and loans, while Boeing will receive a share of $17 billion earmarked for industries favored by Congress. Another $500 billion will go to cruise lines, hotels, and other firms that have lost business because of travel restrictions and the economic shutdowns.

Politicians of both parties heaped praise upon themselves for their “bipartisan” efforts, which in real life only can mean that Congress cleaned out what was left of the IOUs in the till. Rep. Thomas Massie, a Republican from Kentucky, drew attacks from all sides as he tried to force a roll call vote (as opposed to the voice vote that the members wanted) and announced his opposition to the bailout. President Trump called for his expulsion from the Republican Party while Democrats declared him to be an unsavory ideologue.

There is not much to do but to wait for the results, and they will unfold over time. However, much of this bill’s harm is invisible, the way that termites quietly but surely destroy a house when homeowners fail to detect them. The politicians and the pundits, along with corporate executives, are hailing this infusion of public funds to business as a lifeline to the economic system itself, when, in reality, it will weaken these firms in the long run.

This commentary deals mostly with the airlines, but what we say here applies to any firm receiving rescue funds and loan guarantees. While some of these essentially bankrupt firms gain some relief as taxpayers and consumers pony up to pay the companies’ bills, the temporary cash infusion allows them to kick the financial can down the road and not deal with the underlying problems that they are facing, at least for now.

In a recent New York Times op-ed piece, Tim Wu of Columbia University asks the following: “Are taxpayers rewarding a decade of bad behavior?” If he is asking specifically about US airline firms, the answer is a resounding yes. Wu notes that in recent years the airlines have been very profitable but that instead of building defenses against possible downturns that are not easily predicted (such as the coronavirus crisis), they have used much of their profitability to buy back their own stock.

Obviously, stock buybacks are controversial, and as long as stock prices rise, company officials look like financial geniuses. However, if the markets crash or if bears loom on the horizon, all of that value vanishes very quickly and the companies are left in worse shape than when they began. As a financial strategy, stock buybacks are inherently risky and tie up cash that could go toward capital development or even the “rainy day” fund for the inevitable market downturn. Writes Wu:

During the past decade, flush with cash, most of the companies in line to get taxpayer money did not prepare for a downturn. Instead, they spent enormous sums on stock buybacks, which reward shareholders and increase executive pay. For example, the airline industry, which is prone to booms and busts, collectively spent more than $45 billion on stock buybacks over the past eight years. As recently as March 3 of this year, with the crisis already beginning, the Hilton hotel chain put $2 billion into a stock buyback.

Such behavior is especially galling given that the airlines received a major bailout in the immediate wake of the 2001 September 11 attacks that severely damaged that industry. Likewise, Congress spread out the rescue money in 2008 and 2009 to deal with the infamous housing bubble that the government and the Federal Reserve System created. Yet here are the Usual Suspects once again gathering around Washington, collective hats in hand.

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