About 20 years ago, my parents gave me a bailout.
I had gotten divorced and was broke, and had moved back to New York City. My job here paid better, but I still had a pile of installment debt from when I was married. So one day, my parents sent me a check for $5,000. It didn’t totally wipe out my debts, but it put a big dent in them, and I was able to better balance my books going forward.
I ultimately got completely out of debt, and then… I fell in love again, and got married. And one hates to say ‘no’ to one’s beloved. My new wife is more reasonable about money, so it wasn’t the crisis it was the first time, and things stayed under control. But I got further into debt when I went into business for myself. Today, I still am in debt, but I’m working to pay it back.
What can we learn from this?
- Bailouts work if the bailout has actual value behind it. My parents bailed me out with actual money they had in their checking account. (OK, it’s fiat money, but it represents the savings of my parents, who didn’t have to borrow to send it to me.) When the Feds bail out banks and insurance companies with money they don’t have, it merely kicks the can down the road… and turns it into a bigger can. And ultimately someone who has real value (i.e. the rich) will have to really bail us out.
- Bailouts don’t change behavior. You may be chastened by having received a bailout, but the feeling will wear off, and given the same circumstances as before, you’ll be back to your old tricks.