Who Benefits from Bank Bailouts?
Well, according to this Daily Telegraph article it is not only banks, but both savers and borrowers too who benefit from the £500 billion government bailout like the one we have seen today in Britain. While it is true that the bank CEOs whose companies went bust, the depositors of those banks and current borrowers who are in debt in the banking system as a whole benefit it is certainly false to say that all banks, borrowers and savers benefit from a bailout.
What the telegraph has missed is the crucial point that Ludwig Von Mises made in ‘Human Action’ (1949) about the printing of money that the Austrian School has been repeating ad nauseum for over a century. This can be summarised as follows:
Inflation is defined as an increase in the money supply.
1. When money is printed the relative purchasing power of any unit of money already existing in the rest of the economy is decreased.
2. It is the person who receives the money first who benefits most from pre-inflationary prices and the person who receives the money last who suffers most from post-inflationary higher prices from a decrease in the purchasing power of their money.
As Peter Schiff likes to point out, Governments have no money, all they have is a printing press and the only effect they can have on an economy is a re-arrangement of who pays the debts for mal-investments.
In this case, it is clear that while the depositors of banks like Northern Rock have benefited from the fact that their deposits in the insolvent bank were not lost but guaranteed by government, all savers in other banks which had not collapsed saw an immediate decrease in the relative purchasing power of their savings. In this sense, it is precisely the savers who invested their savings in better run banks who lose out the most for they can now buy less because of this government intervention.
Furthermore, there is also the unintended and unseen consequence that this will encourage other banks to act more recklessly to maximise gain with the knowledge that if they take big enough risks and fail they will be bailed out. This is said to be why Merrill and Bank of America merged because having seen AIG get bailed out and Lehman fail they realised that the bigger you are, the more likely you will be bailed out. In other words, they wanted to be ‘too big to fail’.
Borrowers who indebted themselves before the bailout will benefit for they will now have to repay less in real terms because the value of the amount they borrowed off the bank will have decreased in the ensuing inflation from the bailout. But the borrowers who arrive after the bailout will be investing in a world where the pricing system has become utterly confused. The new money entered into the system by government will increase ten fold under the legalised fractional reserve banking system (FRB) as the banks get ‘loaned up’ which will cause another wave of mal-investments in the ensuing boom leading to the need for another bailout at a later stage. For these new borrowers it will be difficult to distinguish what is a good investment as the real value of goods will become difficult to discern from the inflation and the FRB system.
In the past, bank runs were necessary to remove poorly run and insolvent banks from the system to make way for the growth and expansion of prudent and well-run banks. Bailouts do not reward good business practice, they reward the politically connected at the expense of everyone. There is no incentive for banks to be responsible when risk is socialised amongst the population at large.
In short, only the politically connected and the indebted from before the bailout benefit from bailouts from their unique first access to the fiat produce of the Government printing press.