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they won’t be able to do that. And in the case of car companies, the bailed out companies will buy commodities to be used in their products, something which will mean higher prices for the more well run companies.

And it gets a lot worse if you look at the long term. While not all workers would have been able to find a new job in the short term if their company was liquidated, virtually all should be able to do so after a while, and now in more efficient and well-run companies. But if the company is bailed out, the resources represented by the workers will instead be tied to the less efficient bailed out company. Similarly, most capital equipment can probably eventually be sold to other companies. And even the equipment that can’t be used in its current form can see its commodity content recycled and used enable new investments by the new more efficient companies. If free competition is replaced by bailouts and subsidies, the process which weeds out less efficient companies and replaces them with more efficient companies will not work and we will be left with a less efficient business structure.

Moreover, the bailouts will create what is commonly referred to as “moral hazard”. That is, because companies seeing the precedent set by the bailout will figure that –consciously or unconsciously- it’s not really so important with competent management and that it is not so important to avoid taking large risk, because if everything goes wrong, the government will come along and bail them out. That will of course mean that we will have more of the irrational and risky business decisions that created the (perceived) need for the initial bailout, which in turn will of course create the “need” for even more bailouts. A good case can be made that one of the causes of the current financial crisis was the numerous bailouts by former Federal Reserve chairman Alan Greenspan, which placed a lot of financial institutions under price risk.


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