When bailouts don’t work

Bank bailouts don't work, GoldMoney founder James Turk writes in his latest commentary, celebrating Iceland's revival after refusing to make itself the slave of big banks. Turk's commentary is headlined "When Bailouts Don't Work" and it's posted at GoldMoney here:

Sometimes bailouts do not achieve what is intended, which is one reason they
should be avoided. The people of Iceland apparently have some discerning insight
into this basic financial reality.

James Turk:

When a financial collapse over three years ago sent their economy into a
tailspin, Icelanders were given a chance to vote on whether they should impose
more debt on themselves in order to bail out insolvent banks. The Icelanders
decided to reject the proposed debt burden and the accompanying draconian
austerity that would be required. As it turns out, they chose wisely. Happily,
Iceland’s economy is back on its feet. As the BBC reported a few months ago:
“Iceland is safe to invest in again, according to Fitch, which has upgraded its
credit rating three years after its economy spectacularly collapsed.”

In contrast to what happened in Iceland, people in the eurozone were not
given a chance to vote on the serial bailouts or the oppressive austerity
measures that were intended to solve Europe’s long simmering bank and sovereign
debt crises, but have failed to do so. Consequently, following the Spanish
election that resulted in a leadership change, the recent election results in
Greece and France that dealt incumbents with stunning losses should not be a
surprise. They should be seen as an inevitable reaction by citizens in those
countries rejecting the economic choices made by their governments.

As the Greek election shows in particular, impatience against incumbents,
whether socialist or conservative, has reached an unprecedented level. Ideology
no longer matters when an economy is in tatters and unemployment is at record
levels.

Perhaps the various European election results also reflect rising
disenchantment with European Union policies. Germans and Italians don’t want to
bailout Greece or Spain anymore than New Yorkers and Texans would want to
bailout California.

Demonstrators have taken to the streets in many cities across the EU
protesting decisions concerning their country’s economic future. Worryingly, the
growing social unrest is likely to be exacerbated as economies throughout the EU
falter. Economic activity will not improve until unemployment starts falling,
and the prospect for that is unlikely because the capital needed for investment
is being better rewarded elsewhere in the world.

The implications are clear. Many voters and demonstrators have recognised
that governments have taken for granted the hard-working citizenry, principally
the masses of the middle class who have seen their lifestyle evaporate along
with their savings.

Remedies that papered over problems in the past will no longer work. Today’s
financial problems cannot be left for central planners to solve in the future.
What worked in the past when debt loads were small, will not work today because
debt loads are huge.

In short, there is just too much debt. The sovereign debt crisis – and the
interrelated crisis of banks that own too much dubious quality paper of
over-indebted governments – is a powder keg, and the fuse has already been
lit.

The bailouts have not worked. Good money was thrown after bad. We are now
seeing the unintended consequences. In this environment of financial
uncertainty, each person needs physical gold now more than ever. It is the
world’s safe-haven currency.

July 8, 2012 (Source: GoldMoney)

http://www.goldmoney.com/gold-research/james-turk/when-bailouts-dont-work.html?gmrefcode=gata

Thanks to Chris Powell for the link.