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Pragmatic Capitalism

Capital for Living a More Practical Life

BAN THE BAILOUT?

Interesting comments from David Rosenberg with regards to Greece this morning.  He says we should ban the bailouts as the potential long-term damage is greater than any near-term ramifications:

“First we have governments bailing out banks (and auto companies and mortgage providers), homeowner debtors, and now we have governments bailing out governments.  When does someone finally say — enough is enough!

Oh no — bank ABC is too big to fail.  Company XYZ is too complex to fail.  And now country GRK is too interconnected to fail.  Give me a giant break.   Look, Greece is not going to “fail”.  They are going to default.  There will be a debt restructuring.  And there will be some recovery.  Bondholders will take a haircut — why shouldn’t they?  Why should Angela Merkel care if German banks own Greek bonds?  Greece has been in default in its recent 200-year history almost half the time.  So has most of Latin America come to think of it.  What about Russia?

So Greece defaults, bondholders who knowingly bought these instruments knowing the historical record went for the yield and simply do not deserve a taxpayer supported bailout of any kind.  To actually come to the aid of Greece (especially after all the accounting gimmickry) would send a signal to investors that the best way to make money is buy the debt of the most risky and highest yielding enterprise because there will always be a bailout.  Rewarding bad investment decisions is a huge mistake, in my opinion.

Let Greece default, the world will not come to an end, and whether or not the country gets a “bailout”, the fiscal drain is going be a pervasive drag on economic activity for at least the next five years.  While there may be contagion risks — same deal.  Investors who bought Club Med bonds with their stretched government balance sheets in order to stretch for yield don’t deserve to be bailed out either.

Taxpayers unite, wherever you live (because you too support the IMF).  These are solvency issues we are talking about, not liquidity issues.  This is about bad decisions, not market failure. “

Sorry David, no one fails in this world.  Bailouts for everyone!

Source: Gluskin Sheff

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