Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Government Bailouts Actually Lower GDP Growth Potential

Economics / Credit Crisis Bailouts Jan 17, 2013 - 04:22 PM GMT

By: InvestmentContrarian


Sasha Cekerevac writes: What does it take to create and sustain long-term gross domestic product (GDP) growth in an economy?

One of the most important factors is a high level of investor confidence.

Investor confidence throughout the economy can help support the formation and expansion of businesses and the development of new technologies and ideas.

GDP growth, as we all know, does not originate from government-led initiatives, but from businesses creating new innovations and technologies.

One of the problems with government intervention is that GDP growth is actually stifled and reduced due to a misallocation of resources. This misallocation of resources occurs when weak firms are supported or bailed out due to poor management decisions.

The funds allocated to support weak or underperforming companies are then unable to flow into stronger corporations that can expand, innovate, and make the economy fundamentally stronger, lowering GDP growth potential and ultimately weakening investor confidence.

Over the last few years following the financial crisis, many have thought about ways to prevent such an outcome. One of the more original writers of our time is Nassim Nicholas Taleb.

Author of the famous books Black Swan and Antifragile (both of which I highly recommend), Taleb recently suggested several ideas, with which I completely agree, to reduce the possibility of another financial crisis, while helping restore investor confidence.

One of the most interesting ideas I’ve heard to restore investor confidence is to remove the incentive for firms to become too big to fail. Instead of forcing companies to be broken up, Taleb suggests that any firm deemed “too big to fail” should pay its staff no more than a corresponding civil servant. (Source: “From Fat Tails to Fat Tony,” The Economist via The World in 2013, last accessed January 15, 2013.)

According to Taleb, since the government is effectively backing the company, the firm is essentially an extension of the government and should not pay employees any higher wages than other government workers.

Another good idea from Taleb that would help restore investor confidence and long-term GDP growth is that any person who becomes a politician should never earn more than a set amount from the private sector, meaning no massive payday.

As it stands right now, politicians have the huge incentive to create favorable conditions for a company that they might join upon leaving politics. This can lead to a massive misallocation of capital that favors companies that will grant guaranteed bonuses and jobs to politicians; not what’s best for the economy.

Any time an economic decision is not optimal for the economy, potential GDP growth levels will decline and investor confidence will weaken.

One idea that Taleb suggests, which I have supported for some time, is that the “value-at-risk” calculation should be banned. The problem with trying to calculate risks in such a manner is that they underestimate the possibility of massive moves.

By creating a lower-than-expected probability of an extreme event, the risk manager assumes false confidence. This leads to higher levels of risk-taking, making the entire system more fragile.

The core to all these ideas is not changing how humans act, since that’s not possible, but working with our human traits. This is something that I’ve suggested for a long time: creating an incentive and disincentive structure for all major human activities.

For an economy to generate strong, long-term GDP growth, we need to incentivize people in the proper areas. This will create a high level of investor confidence in the knowledge that the funds allocated to various businesses are being used in the best possible way.

Investor confidence has waned over the last few years due to the inexcusable level of uncertainty throughout the economy. Business owners are constantly unsure of how politicians will act. Plus, there’s the structural fragility of some parts of the economy due to government intervention and bailouts.

Sustainable GDP growth has to be built on a solid foundation. This means that businesses that are truly innovative will have capital flowing into them that’s not based on bureaucratic intervention.

Risks to the entire economy need to be systematically reduced by creating natural disincentives to government bailouts. We can’t have it both ways; the company managers can’t take risks if they are not willing to bear the losses.

This type of structural reform, I’m afraid, is not likely to occur anytime soon. With so much of the infrastructure embedded, this naturally will lower GDP growth potential for the economy.

For now, all we can hope for is a lower level of government intrusion to help restore investor confidence and to at least try to improve GDP growth levels to a sustained level.


By Sasha Cekerevac, BA

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

About Author: Sasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. See Sasha Cekerevac Article Archives

Copyright © 2013 Investment Contrarians - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Investment Contrarians Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in