The Bailout Bias

WARSAW – The seemingly never-ending debate over the eurozone’s fiscal problems has focused excessively on official bailouts, in particular the proposed purchase of government bonds on a massive scale by the European Central Bank. Indeed, we are warned almost daily – by the International Monetary Fund and others – that if bailout efforts are not greatly expanded, the euro will perish.

For some, this stance reflects the benefits that they would gain from such purchases; for others, it reflects mistaken beliefs. Creditors obviously support bailing out debtor countries to protect themselves. Many political leaders also welcome official crisis lending, which can ease market pressure on them. The media, meanwhile, always thrives on being the bearers of bad news.

Mistaken beliefs, on the other hand, are reflected in metaphors like “contagion” and “domino effect,” which imply that financial markets become blind, virulent, and indiscriminate when they are disturbed. Such terms provoke fear that, once confidence in any one country is lost, all others are in danger.

According to this logic, it follows that only a formidable countervailing power – such as massive official intervention – can halt the ravenous dynamics of financial markets. Widespread use of expressions like “aim a bazooka at the eurozone,” and “it’s them or us,” demonstrates a pervasive Manichean view of financial-market behavior vis-à-vis governments.