I'll expand more on this concept later, but the irony of our financial problems today lay partially in the failure to allow failure. Without failure there can be no success, this is the essence of creative destruction. Our system of bailouts has distorted the marketplace and rewarded failure while punishing success. What about those that lost money buying the stocks of bailed out financial firms you may ask? That is punishment, however please explain to me why taxpayers had to step in ahead of the bond holders of these companies? Please tell me why my hard earned money, which was not invested in bank stocks was required to bailout bond holders of these firms when they in fact made an active choice to invest in these firms? Shouldn't people who make an active decision to bear investment risk actually take losses before the taxpayers are expected too? This failure to allow bond holders to lose money will have severe repercussions long term throughout our entire capital system.
By not allowing failure we prop up companies like Citigroup and GM we punish the companies that could have gained market-share as a a result of the failure. This is how markets work, good decisions are rewarded (eventually) and bad punished (or so we thought). Instead we have created a system where the good decisions are no longer being rewarded (at least like they should) and the bad decisions are in fact being rewarded (bailed out bond holders and government backing). This market distortion can only continue for so long - at some point it must fail. The problem with this new system failing is that it will be much, much worse than had we allowed failure to happen in the first place.
Scott Dauenhauer CFP, MSFP, AIF