Government Bailouts Help the Profligate, Harm Main Street Investors
This year’s bailouts aren’t the first in US history. From the Chrysler bailout in 1980 to the economy-wide bailouts in 2008 and 2009, the US government has an unfortunate history of stepping in to keep major market players from going out of business. But this year’s bailouts are undoubtedly the biggest so far. The bailout cycle is repeating itself now, with over $2.5 trillion spent so far to keep numerous businesses operating, and the prospect for hundreds of billions, if not trillions more dollars, being spent to keep major corporations in operation.
The problem with bailouts is that in most cases they’re rewarding poorly managed companies and allowing them to stay in business, thereby punishing their better-run competitors. In the case of small businesses that had no idea they would be shut down by governments, one could understand them wanting or needing a bailout. But so much of the funds earmarked for small businesses went to public companies, hedge funds, and others who just wanted a free handout.
In the case of financial sector bailouts, and in particular Federal Reserve loans and credit facilities, financial institutions are being rewarded for their risky behavior by getting bailouts. Rather than being allowed to go out of business, ensuring that market discipline will manage risk, those firms are actually given a competitive advantage against their less risky and better run competitors. The lesson that sends is: engage in as much risky, leveraged investing as possible because the Fed will bail you out in the end.
Those bailouts harm investors who engage in sound investing, analyzing markets for investment opportunities, and who are interested in building long-term wealth. They incentivize the short-term, get rich quick mentality. With bailouts, using massive amounts of leverage is perfectly okay, because you can make huge profits when you’re successful, and you get bailed out by the Fed when you’re not. Bailouts have given rise to perverse incentives to be as risky as possible, rather than to be fiscally responsible.
With bailouts, those who actively do harm to the financial system get rewarded for their behavior, while Main Street investors see their investment portfolios hammered through crash after crash. The past 20 years have seen two major stock market crashes that have eroded huge amounts of investor assets in mere months, and we’re on the verge of a third that could turn the 2020s into a lost decade as far as investors are concerned.
More and more, the only way that investors are going to be able to weather the current storm is by thinking outside the box. Eschewing traditional investments, they’re going to have to start looking at alternative investments like gold and silver in order to make gains in what could turn out to be a very rough decade for investors. Thankfully, with a gold IRA, silver IRA, or precious metals IRA, they can roll over existing retirement assets into precious metals investments without tax consequences, while still enjoying the same benefits as conventional IRAs. While Main Street investors may not get bailouts from the government, they can still protect their assets against financial crisis, economic turmoil, and stock market crashes through a gold IRA.