Tinkering with the free market

December 26, 2012

The Dec. 21 editorial “Profits and losses” missed a major point in calculating the costs of bailouts only in terms of returns to the government. One of the largest costs of bailouts is the moral hazard they induce by shielding imprudent investors from the consequences of risk by not allowing them to fail. Such precedents only lay the groundwork for even greater imprudent risk-taking, especially as enterprises deemed too big to fail grow in size, subsidy and political connections.

If we include various stimulus measures in the forms of direct government spending and “quantitative easing” by the Federal Reserve as bailouts, as we should, another huge cost is that of bubbles and mal-investment — the consequence of easy money directed to instruments and projects that would not withstand market scrutiny without an artificially inflated money supply.

The impact of these two major economic distortions of bailouts is difficult to quantify but is surely larger than their original, nominal price tags.

Merrill Smith, Washington

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