Thursday, December 17, 2009

The Hidden Costs Of The Bailouts

The bailouts of the US financial and auto sectors cost the US taxpayer measurable amounts of money. Some of the companies that were lent to will go bankrupt, and some are in the process of paying back their government loans; in the end, the eventual taxpayer cost will be known.

But one issue which is largely ignored in the bailout vs no-bailout debates is the precedent that was set on international trade. The US has consistently imposed tariffs when it has felt that international government subsidies for foreign companies have disadvantaged American companies. By bailing out domestic auto makers, does the US lose all credibility in this regard?

It would now seem quite hypocritical for the US to argue that free markets should decide which companies should survive. Just last year, the US threatened sanctions against China for export subsidies on textiles. If China can make a case which parallels the arguments the US uses to justify bailing out domestic auto makers (e.g. the threat of widespread unemployment, serious harm to the economy etc.), does the US have any moral authority anymore?

It would seem that for the foreseeable future, countries will be able to justify bailouts of certain industries. Any government that wishes to bail out certain industries or companies which are headquartered in its jurisdiction is now free to do so.

Unfortunately, this strategy is harmful to overall productivity, which is the driving force behind our standard of living, as we discussed here. By sustaining the least profitable companies rather than allowing the superior companies to grow their market shares, we all lose in the long run. Unfortunately, it is a politically popular move, because it saves jobs in the short-term; but it represents a cost in the long-term that will largely go ignored.


Rayhaan said...

Yo saj, (i hope this doesnt end up doing a disservice to ur clients ) i was wondering wid millions of stocks out there how do u BEGIN? I mean 4 lack of a better 'turn on' i tend to start wid low p/e ratios n debt b4 doing any further research seriously handicapping myself to other oppurtunities, got any suggestions? P.s (all this free loading of knowledge is really making me guilty coz lets face it, its easier to read bk than security analysis) which countries oppurtunities r available to u guys?( u ve written many times bout undervalued chinese stocks)

Saj Karsan said...

Hi Rayhaan,

Yeah stock screeners for low P/E, P/B and debt are good as you mention. Also, reading the ideas of other value investors, word of mouth etc. Like you say, there are a lot of stocks out there, so just focus on a few at a time! I stick to stocks listed in North America (including the Chinese ones you mentioned).