The American people need to realize that while some broad-based financial bailout may be necessary, no version will provide a quick or sure cure for our nation’s problems. A bailout is a palliative rather than a cure. By ‘palliative,’ I mean a treatment that provides beneficial relief of acute symptoms and may facilitate other treatments for the sickness, but is not a cure in itself.
The best analogy I can make is from something I saw 38 years ago. I was near a helicopter landing pad at Landing Zone English, the main base of the 173rd Airborne Brigade in Vietnam. Medics were loading a sick soldier on a helicopter for an emergency flight down to the 67th Evacuation Hospital near Qui Nhon. He had falciparum malaria, or “blackwater fever,” the most dangerous strain of malaria.
The medics had him on a waterproof poncho on a stretcher and were packing ice directly against his body. Then the chopper took off, with a medic on board holding ice packs against the patient’s head.
Ice does not cure falciparum malaria. But the disease can be deadly and can cause such high fever that the patient can suffer permanent brain damage. Lowering the patient’s body temperature with ice for a 20-minute medivac flight was a palliative measure that increased the chances of his eventual full recovery. It reduced the worst and most dangerous symptom of an underlying illness until effective treatment could be made.
Panic in U.S. financial markets that is causing a near-breakdown of capital lending is not the root financial problem. It is a symptom of the fact there is a lot of bad debt that someone must write off. Most is in the form of bad mortgages or related financial instruments like “collateralized debt obligations” and “credit default swaps” that are worth much less than their face value.
That loss of money eventually will have to be absorbed by someone — lenders, insurers, hedge funds, 401(k) plans, investment banks, commercial banks, borrowers, savers or taxpayers.
Eventually someone will have to bear the cost. That will hurt. In the meantime, financial markets are in a game of passing the hot potato. Nobody wants to lend money or buy securities, because it might mean ending up with a potato in your lap that no one else will take and that actually may burst into flames and burn you to death.
Credit markets might seize up completely, and that would cause a recession that would cost the average family more than their share of the bailout will.
The bailout is just a measure to get credit flowing again. It restores confidence and buys time. But the economy won’t be healthy until all the bad loans and securities are out of the system.
The bailout isn’t fair, and bearing the losses, by whomever must eventually do so, won’t necessarily be fair either. But it’s better than having the patient’s fever spike and watching him die before the helicopter reaches its destination.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.