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The Bazooka Theory is Backfiring

Yesterday, we blasted the Bazooka Theory at work in the European Union's bailout of Ireland. Today, the Wall Street Journal provides even more evidence of the stupidity of the theory:

arnold commando
Source: Twentieth Century Fox
arnold commando

"The details of the IMF and EU bailout of Ireland remain sketchy, but one thing is already clear: The Bazooka Theory of financial rescue does not work as advertised.

In July 2008 then-Treasury Secretary Henry Paulson explained why he needed the power and money to rescue Fannie Mae and Freddie Mac: "If you have a bazooka in your pocket and people know it," he told Congress, "you probably won't have to use it." Congress gave him the bazooka, and Treasury is still reloading it to prop up the mortgage-finance giants.

In May, the European Union acquired its own bazooka, a €750 billion stabilization fund for euro-zone members over their heads in debt. Like Mr. Paulson, European officials, especially in Germany, insisted at the time that the mere existence of the fund would calm markets and mean they'd never have to fire a round.

They're firing now, though whether they're hitting their targets isn't clear. Greek bonds are trading at bigger spreads to German debt than they were in May, and Athens's budget targets keep slipping. Now Ireland will be bailed out too, though that news has had only a modest effect on Irish debt, and it has done next to nothing to reduce borrowing costs in Madrid and Lisbon. The cost of insuring Portuguese debt rose Monday, while German bond yields rose and the euro fell. Markets seem to think the bazooka has many more rounds to fire."

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