Bailouts only disarm those that benefit from it

Thomas Friedman is such a good writer. In Sunday’s NY Times he presents a situation that is very plausible… and a conflict of interest. Here is what he writes in piece called If Larry and Sergey Asked for a Loan …

Let’s imagine this scene: You are the president of one of these banks in which the government
has taken a position. One day two young Stanford grads walk in your
door. One is named Larry, and the other is named Sergey. They each are
wearing jeans and a T-shirt. They tell you that they have this thing
called a “search engine,” and they are naming it — get this — “Google.” They tell you to type in any word in this box on a computer screen and — get this
— hit a button labeled “I’m Feeling Lucky.” Up comes a bunch of Web
sites related to that word. Their start-up, which they are operating
out of their dorm room, has exhausted its venture capital. They need a
loan.

What are you going to say to Larry and Sergey as the
president of the bank? “Boys, this is very interesting. But I have the
U.S. Treasury as my biggest shareholder today, and if you think I’m
going to put money into something called ‘Google,’ with a key called
‘I’m Feeling Lucky,’ you’re fresh outta luck. Can you imagine me
explaining that to a Congressional committee if you guys go bust?”

And
then what happens if the next day the congressman from Palo Alto, who
happens to be on the House banking committee, calls you, the bank
president, and says: “I understand you turned down my boys, Larry and
Sergey. Maybe you haven’t been told, but I am one of your shareholders
— and right now, I’m not feeling very lucky. You get my drift?”

Maybe nothing like this will ever happen. Maybe it’s just my imagination. But maybe not …

But the part of the column that really gets me is this quote of David Smick who wrote The World is Curved: Hidden Dangers of the Global Economy:

“Government bailouts and guarantees, while at times needed, always come
with unintended consequences,” notes the financial strategist David
Smick. “The winners: the strong, the big, the established, the domestic
and the safe — the folks who, relatively speaking, don’t need the
money. The losers: the new, the small, the foreign and the risky —
emerging markets, entrepreneurs and small businesses not politically
connected. After all, what banker in a Capitol Hill hearing now would
want to defend a loan to an emerging market? Yet emerging economies are
the big markets for American exports.”

The losers as he notes are usually small or new or not quite established. And he is right, except for the time horizon. The winners in this case often eventually fail because they miss opportunities, niche customers, and don’t have that edge that is needed to succeed. There is something so vital to the economy that tears it down and builds it back up again – competition. And bailouts only disarm those that benefit from it.

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