Tags: Bank | Bailouts | government | stay

George Mason Economist: Bank Bailouts Are Here to Stay

By    |   Wednesday, 27 June 2012 12:12 PM

Government bailouts of banks channel capital to industries that are not competitive and have high levels of debt, Garett Jones, senior scholar of George Mason University's Mercatus Center, told CNBC, adding that the bailouts are here to stay.

“For a more prosperous future, bank bailouts are not a good sign,” he said.

“Economies where the banks are really influenced by the government just tend to have worse futures.

“We always treated bank bailouts as an emergency ripcord but it’s turned out to be just a constant diet for the rich countries. And I think that’s something that’s going to stick with us for a long time,” he added. “Bailouts, especially bank bailouts, are forever.”

Bank bailouts are necessary in some instances because some banks are too big to fail.

“This is the cruel tradeoff. If your only two alternatives are a five-year legal bankruptcy process or a government bailout, the bailout looks pretty good,” Jones stated.

“The rich-country bureaucrats have tried to come up with some kind of middle ground, what I would call speed bankruptcy, where you can tell the bondholders over the course of a weekend, ‘hey guys, you are going to get 80 cents on the dollar, you’re going to get 60 cents on the dollar,’” he added.

Earlier this week, Spain, which is the eurozone's fourth-largest economy, made a formal request to euro area governments seeking a loan to rescue its banking sector, Bloomberg reported, as Moody’s downgraded 28 of the country’s banks.

Cyprus also requested a loan to bailout its banks this week, The Associated Press reported.

These bailouts keep debt high and “prolong weakness in economies and companies,” Jones told CNBC.

“Capitalism still works. The idea of decentralized ownership and real competition works really well,” Jones said. “The sectors that have failed are those that have implicit or explicit government backing, so capitalism makes big mistakes but to make the whoppers, it helps to have a government guarantee.

“I think the right reforms can get us away from the world of permanent bailouts,” he added.

“The biggest banks, the megabanks, tend to issue vast amounts of long-term debt. If that long-term debt could be converted into equity or be given quick haircuts with the approval of courts, I think that that makes the unsound banks into sound banks,” he noted.

“So Citigroup Inc., JPMorgan Chase & Co. and other globally large banks, those haircuts are enough to make them solvent,” Jones stated.

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Wednesday, 27 June 2012 12:12 PM
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