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Financial Planning > Behavioral Finance

Forecasters: Government Bailouts Could Backfire

By Daniel Hays

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Massive efforts to support troubled financial institutions might end up increasing instability, by affecting the “precarious fiscal positions” of the United States and other countries.

The World Economic Forum, Geneva, Switzerland, presents that prediction in the 2009 Global Risks Report, a world risk assessment conducted by forum staffers with help from experts at Swiss Reinsurance Company, Zurich; Marsh & McLennan Companies Inc., New York; Zurich Financial Services Group, Zurich; and the Wharton School Risk Center, Philadelphia.

The authors of the report note that the United States is currently running a deficit equivalent to 4.6% of the country’s gross domestic product.

But the warning against excessive spending applies to Australia, France, Italy, Spain and the United Kingdom as well as to the United States, the authors of the report write.

Trying to address immediate economic concerns without remedying the root causes could sow the seeds of new problems that may have a strong impact at a later date, the report authors warn.

Global equity values already have fallen an average of 50%, and there continues to be vicious circle involving declining asset values, write-downs and pressure on financial institution capital positions, the report authors write.

Sellers have flooded the markets with more assets than they can absorb, triggering further price drops and further financial institution capital charges, the authors write.

Meanwhile, chronic diseases, wars and terrorism continue to mar the lives of many, and the threat of a major influenza pandemic continues to loom in the background, the authors write.

The authors acknowledge the need for better governance globally but warn against a knee-jerk overreaction that could increase transaction and compliance costs and ultimately prove ineffective in the face of the next crisis.

But this year could prove to be an opportune moment to strengthen global governance and build the political will to restore global financial stability and focus on the longer-term challenges of managing scarce resources and climate change, the report authors write.

“If business leaders and decision-makers can overcome the behavioral biases toward immediate, short-term solutions and switch to longer-term thinking, then they will have made significant progress in adopting an attitude suited to the mitigation of increasingly complex and interlinked global risks,” says Howard Kunreuther, co-chair of the forum’s Global Agenda Council on Mitigation of Natural Disasters.

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