No, the Bank Bailouts Created the Crisis

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Back in 1988, real estate mogul Donald Trump wrote the bestselling book, The Art of the Deal. One of the highest profile success stories of the ‘80s, Trump's book was written to explain to those not-yet-rich how to become fabulously wealthy like, well, Trump.

Fast forward three years, and Trump released The Art of Survival, which chronicled his recovery from a negative net worth that the Wall Street Journal reported at the time as being in the $300 million range. Trump failed in the late ‘80s, and if the Journal's account was true, failed stupendously, only to recover again. And since the victors invariably get to tell the tale of their success, Trump has continued to release other books over the years talking about how the ambitious in our midst can become like him.

Trump's professional rebirth, while offensive to some who decry his self-aggrandizing ways, at the very least serves as a reminder that failure is in no way permanent. And with the U.S. "economy" nothing more than a collection of self-interested individuals, just as individual decline is hardly everlasting, neither is "country" economic decline perpetual.

That is, unless Federal Reserve Board Chairman Ben Bernanke is the economic storyteller. At a dinner last week, the Fed Chair who doth protest too much yet again forwarded the notion that he and other bureaucrats "saved the world", to paraphrase some of his enablers. Bernanke himself asserted that "Although the economic consequences of the financial crisis have been painfully severe, the world was spared an even worse cataclysm that could have rivaled or surpassed the Great Depression."

Bernanke's argument is that absent the various federal bailouts of banks which the Fed played a major role in, long-term economic decline would have been our reward. Logic tells us he gets things 100% backwards.

Indeed, the failure of financial institutions beginning in 2008 was more than anything a sign that the economy was on the mend. To make basic what is already basic, when businesses can no longer fund their daily operations - meaning investors have lost interest - the market signal is that they've failed their customers, and should be allowed to meet their natural fate.

In that certain sense, bankruptcy, while painful, is an economic good for customers, and nothing more than a change of ownership. Bankruptcy means that poor managers are relieved of their duties so that better managers can deploy the debased assets more profitably. And if the poor managers are forced to sell their assets at fire-sale levels, the potential for profits to be achieved by the new managers is greatly enhanced.

Business failure, be it among car companies, software firms or banks, means that the economy is being cleansed of non-economic activity. Failure, in short, means that capitalism is working for the rough justice wrought by profit and loss weeding out the unsuccessful so that either the successful or ambitious can attempt to make work what the previous managers could not.

To believe Bernanke, the U.S. economy avoided Armageddon for bankrupt firms being propped up on the backs of taxpayers, but simple logic tells us the Fed's actions extended, rather than deterred economic hardship. In bailing out the banks our federal minders not only perpetuated non-economic, depressive activity, but they also planted the seeds of future crises for the economy not being allowed to naturally rid itself of that which didn't work in the first place.

Bernanke's support of taxpayer bailouts as the economy's savior is the equivalent of the drunk waking up hung over, fingering the hangover as his problem, then resuming the drinking in order to blunt the pain caused by the previous night's activities. In truth, the hangover is the signal to the drunk to be more circumspect when it comes to drinking. The hangover is the drunk's cure.

Much the same, the failures among banks, far from the economy-killing problem, were the cure for signaling to prudent and imprudent banks alike what not to do in the future. Capitalism is as much about failure as it is about success, and the much-needed collapses among financial institutions would have once again served as a sign of economic rebirth if allowed thanks to the banking system being purged of poor financial practices.

Looked at in light of the "economic depression" that Trump experienced in the late ‘80s, far from a sign of long-term economic decline on his part, his ability to fail ultimately taught him how to succeed. Considering the violent collapses in the banking world of not long ago, as opposed to them threatening long-term economic frailty, the awful way in which they nearly went under happily revealed for all to see just how poorly they were being run, and more to the point the grave economic damage they were bringing to the economy for existing at all.  The banking practices that delivered them to bankruptcy were the recession, their actual bankruptcy the economy's revival.   

And since failed businesses don't disappear as much they change hands, had the free markets been allowed to work their magic whereby the banks fell into bankruptcy quickly, rather than elongating the recession, their quick declines would have shortened it for new, more sensible management speedily entering the picture. Failure is not death, instead it constitutes revival as assets fall into the hands of those more skillful.

All of this might be obvious to our Fed Chairman were he to cease looking at the U.S. economy through what is a very foggy macroeconomic lens. If so, he would soon become aware that economies are merely a collection of individuals, and that success and failure among individuals is by no means perpetual.

In truth, we can neither succeed nor fail too much. But wherever we presently are on the proverbial Bell Curve of individual economic health, as Trump's example makes clear, simple odds suggest that during our careers we'll experience a fair bit of both, failure by no means forever if we're allowed to learn from our mistakes.

Going forward, Bernanke and his enablers will continue to excuse his and other governmental actions as necessary to avoid economic calamity. Many will accept these explanations without comment or protest.

But for those of us who correctly break human action down to the individual level, the bailouts which Bernanke defends will become increasingly suspect. Just as the allowance of mistakes authors and speeds up success on the individual level, so does it by definition achieve the same on the company or "country economy" level.

In that sense, the only "crisis" of 2008 concerned the unwillingness of our political masters to allow the bankruptcies necessary to cleanse the economy of non-economic practices. Hopefully we've learned from this mistake.


John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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