The International Monetary Fund and the World Bank, along with the United States and other countries, propose once again to rescue troubled countries with a wheelbarrow full of cash, compliments of American taxpayers. The planned $94 billion bailout of South Korea, Thailand, and Indonesia is a lousy idea all around.
The plan should be trashed.
“We have a vital national economic and security interest in helping Korea to restore market stability as soon as possible,” says Treasury Secretary Robert Rubin. “We” means the American taxpayers, since the United States provides the largest share of money to the IMF. One of the ways the U.S. government abuses its citizens is by forcing them to rescue almost anyone anywhere who has some kind of difficulty. It sent troops to Bosnia, Somalia, and Haiti. It appropriates foreign aid every year to a list of nations. It bailed out Mexico when it had a problem with its currency. And now it is leading the bailout team rushing to Asia.
There are three reasons for governments not to bail out those nations. First, the American people have rights. Their rights to life, liberty, and property mean nothing if they don’t mean freedom from government demands for their money every time someone sneezes somewhere in the world. The taxpayers should not be treated as though they are at the government’s disposal whenever it declares that a “vital interest” is in danger. They should be free to go about their business secure in their rights and property. That was the point of the American system.
Second, bailouts have an economic cost to all Americans, as well as other people. That is true even if the rescue loans are repaid. At any given time, there is only a certain amount of capital available for investment. If governments divert capital through the IMF, or directly, to other governments, that capital is not available for investment by private entrepreneurs seeking to serve consumers. To the extent that political leaders make decisions about how capital is used, the economic system is not free and thus not able to promote the interests of consumers.
Third, a bailout cushions the consequences for the decision-makers in the recipient nations who are responsible for the economic problems. Bailouts have been provided many times before, a fact well known to politicians, borrowers, and lenders around the world. The prospect of a rescue inevitably influences the economic decisions they make. People on a high wire without a net below tend to tread more carefully than those who use a net.
The reasons for the economic troubles in South Korea and elsewhere stem not simply from bad private-sector investment decisions but from government intervention in the capital markets. None of the ailing countries has a free banking system, which would bar political influence from distorting lending policies. The New York Times reported, revealingly, “Under the terms of the bailout package, the South Korean government agreed to end its practice of pressuring banks to make loans to troubled or politically connected companies.”
But a bailout is not required in order for Korea to stop running the banking system for its own pet projects. In fact, a bailout is the worst way to effect a change in that policy. What is to stop the Korean officials from finding subtle ways to channel capital to cronies and from assuming that if a future rescue is needed, it will be provided? Better to cancel the government-sponsored rescue and let government officials figure out that the way to have a prosperous economy is for them to get out of the way.
If private lenders wish to help Asian companies that have gotten themselves into trouble, they should be free to do so. At least then people will be risking their own money. Private rescuers can also be counted on to attach sound conditions to any assistance they render.
The key to prosperity and stability is a free economy, where decisions are made privately through voluntary exchange. Governments undermine those goals when they manipulate banking, confiscate incomes, or otherwise interfere with people’s creative efforts. Political leaders will persist in those policies as long as they can get away with them. Bailouts simply put off the day of reckoning and make the U.S. government an accomplice in destructive policies.