Not all bailouts are the same. When a bailout socializes losses but privatizes gains, it can easily be judged through moral lens on top of existing economic reasoning. The interaction between government and the private entities is deplorable exactly because of lemon socialism. I find it harder to make a damning judgment when it is a bailout of government.
Some of the same crucial points applicable in the case of government bailing out private enterprise to me appear to assume lesser weight when it is the government which is being bailed out.
I do not see such bailout as a duty. Duty is too strong a word to describe what I feel but I do experience some grudging willingness to not oppose the bailout. What is troubling for me is that I am struggling to justify that willingness.
Why is a national government any different from a private entity that is too big to fail? Should the bailout in both cases be treated differently?
My initial take is that we individually and collectively do make mistakes sometimes and these mistakes are innocent in the sense that we are unlucky or that we did not know better. This line of reasoning is appealing when the direct stakeholders are the people. The national government, the reasonably democratic one at least, may have made bad decisions on behalf of the people but idea of letting the government fails appears absolutely cruel too me.
Maybe, a second chance is in order and whomever who bail the government out is an angel. What is important is that the government and the people learn their lesson. In some sense, this makes me supportive of the bailout of Indonesian and South Korean governments by the International Monetary Fund. These bailouts impressed upon the governments and its society the lessons of failure. These countries eventually experienced improved overall outcome, not just in terms of government finance and its economy, but it restructured the countries’ politics for the better, especially Indonesia.
Yet, wide suffering of the people cannot be the factor differentiating bailout of government from lemon socialism. In the case of too big to fail that plays a huge part in lemon socialism we have seen in recent years, the absence of bailout can adversely affect the lives of so many individuals indirectly. If lemon socialism is to remain despicable, then regardless of directedness of the stake holding, the suffering factor does not provide a clean cut. The eventual result is suffering in times of crisis however one looks at it.
The magnitude of suffering could partly be the answer, but I find it hard to make objective decision with such a subjective qualifier.
Suffering could be a necessary condition regardless of magnitude, but it alone cannot qualify as a sufficient condition. Somehow, suffering is merely a side issue irrelevant to the consideration of acceptability of bailout.
And there are a lot of sufferings in the world. Some of it is a case of accident and those are most unfortunate. Others are just, in the sense that you reap what you sow. That has to be differentiated. But I do not see how this is helpful in differentiating actions of the two bailouts. In lemon socialism, bad luck and consciously risky action gone bad can affect different people but at the same time. In many times, separating the two in a bailout is extremely hard if not impossible. Observe the bailout of corporations in the US where executive received bonus out of bailout funds aimed at aiding “Main Street”. In that case, one saves the innocents by saving the guilty.
So, I am forced to address the issue from another angle.
What if a government defaults? More than default, a government goes bankrupt. A lot of sovereign national governments have defaulted its financial obligations before but what if a government goes bankrupt?
If creditors assume control of the government, then this may make a bailout appear favorable. If the democratic way of life is cherished, the government would become undemocratic, being firstly answerable to the creditors rather than the citizens. This is probably the most extreme case where the government is effectively colonized because it will have to be put under receivership or the creditors. This is probably the most anti-democratic possibility under national bankruptcy. It is possibly anathema to libety as well, assuming national sovereignty is directly derived from individual sovereignty.
Due to its anti-democratic ending, maybe a bailout is favorable. Still, the recipient of the bailout itself will be beholden to its rescuer. Perhaps, a bailout is only a nicer of collar. The Asian bailouts by the IMF were not pretty, although the alternative was uglier.
(By the way, this is not applicable to Greece and Germany. Germany and others within the Eurozone have to bail Greece and others because they want to defend the Euro. That essentially changes the question from bailout of national government to the favorability of maintaining the euro. Also, the economies are closely-linked that bailing out Greece is the only viable solution, while ignoring moral hazard problem. I am probably thinking the US bailout of Mexico in 1995, or as I mentioned, the IMF Asian bailouts)
But I am in the opinion that such extreme case is unlikely to happen. But what other alternative would prevail in the event of bankruptcy?
It could be something like Germany-like with reparation post-WWI? But the point of bankruptcy is that the national government could not repay the loan. To have the reparation route seems like an abuse by the creditor. But if the route is taken, the “bankruptcy tax” to make up for the default might be a good alternative to a bailout, the problem of seigniorage notwithstanding.
What about the stripping of the government by creditors to claim whatever left as theirs? Would that mean the collapse of government? If the government does collapse and along with the state, would it not be easy to set up a new government and state? Sounds like a good idea and actually strengthens the anti-bailout position. But this would make a mockery of the process. Would the new state be essential a new one or is it really the same state in new clothes? If the new state is actually a new state, then no default in the world would matter because everything can be start anew.
Starting afresh however is outrageous. That is obviously a flawed thinking. It is likely that the market will see the new state as the old state, thus would treat the new state however it treated the old one: demand for high yield is one treatment.
There is a precedent: Argentina in 2002. That ended with merely debt restructuring, and along with grave civil disturbance, capital flight and depressed economy, although most of these were the results of ongoing economic crisis that caused the default in the first place. I said merely because the creditors did not have a hold on the government, the government escaped any retribution from the creditors (despite it suffering economic backlashes) and in fact, the creditors were punished through the debt restructuring. And this actually makes default favorable to me (although it is unclear to me if that default is equivalent to bankruptcy).
This is turning out to be a rambling where I bite more than I can chew.
So what exactly will happen if a national sovereign government, or better, a state goes bankrupt? Does it only mean outrageous yield? Collapse? Effective occupation by creditors?
In the end, whether or not I prefer a bailout to bankruptcy depends on the end results. I am a consequentialist as far as bailout is concerned. But this is unhelpful and goes against my preferred way of deriving an issue from the principle, in the sense of John Rawl’s Veil of Ignorance. What good is it to be able to decide after the fact?
Maybe I am thinking too much from the perspective of the state. I will continue to think more about this. But for now, time to read.
