Is the third time the charm, at least for bailouts?
First, we had the TARP bailout in the United States, and that turned out to be a corrupt mess.
Second, we had the Greek bailout, which has squandered hundreds of billions of euros to prop up a welfare state.
Now we have a third big bailout, with China seeking to stabilize that nation’s faltering stock market. So anybody want to guess how this will work out?
To put it mildly, the Wall Street Journal does not have a favorable opinion of this financial market intervention.
Beijing…officials pumped public money into the market. It hasn’t worked; the Shanghai Composite Index closed Thursday at 3661, 29% below its June peak. …Peking University economist Christopher Balding has added up the bailout and stimulus measures announced since the market panic started in late June. They total $1.3 trillion, or more than 10% of GDP.
So why is this a bad thing?
For two reasons, as the WSJ explains. First, it’s an unjustified wealth transfer. Second, it creates an economic environment contaminated by moral hazard.
Investors who bought when the market was already frothy are getting a chance to exit with some of their profits intact. But Chinese who don’t own stocks are justified in asking why they must subsidize their fellow citizens’ poor decisions. Mr. Balding’s spreadsheet shows that the market-rescue measures represent a huge transfer of wealth to investors who should have been prepared to shoulder the risks when they bought shares. The failed bailout reinforces the expectation that Beijing will attempt to manage the financial markets in the future. This moral hazard means the volatility will continue, along with the costs of future bailouts.
You won’t be surprised to learn that I share the Wall Street Journal’s skepticism. In a recent interview with Neil Cavuto, I said the Chinese government (like just about all governments) is too focused on short-run pain avoidance.
In other words, by trying to prop up markets in the short run, I think the Chinese government will cause a far greater amount of economic pain in the long run.
Two other points from the interview deserve highlighting.
- China’s economy needs more economic liberalization (as opposed to the snake oil being peddled by the IMF) if it hopes to become a first-world nation. While there’s been a lot of progress since the wretched deprivation and poverty of Mao’s era, China isstill way behind the United States and other nations with more capitalistic systems.Hong Kong, Singapore, and Taiwan are appropriate role models.
- Whenever folks on the left point to a “success story” that ostensibly proves big government and central planning are more successful that capitalism, it’s just a matter of time before they’re proven wrong. Some of them were delusional enough to think the Soviet Union was economically successful (see bottom of this post) and events proved them wrong. As I pointed out in the interview, some of them thought Japan’s model of central planning was the ticket for prosperity and events proved them wrong. More recently, some of them have argued that China’s state-driven economy was a role model and they’re now being shown to be wrong.
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Image credit: wuwow | Pixabay License.
