Monday, June 1, 2009

The worst bailout of all

Bailouts are difficult to justify in general, because of the adverse effect they have on anticipations and thus the moral hazard they induce. They can only be justified if this moral hazard risk can be outweighed by a strong positive welfare effect. Say, in the case of the bailout of the Big Three car manufacturers, that there is the threat that a new Great Depression would ensue, like Edward Lazear thought when he advocated intervention last September. We can discuss this assessment, and also whether it is a good idea to bail out the financial industry, the airline industry or whoever else is going to line up. But I have just been made aware of the least justifiable bailout of all: Belgium sinking a billion euros into the diamond industry.

Why? Because the diamond industry is a fraudulent operation to begin with. The world market for diamonds is overwhelmingly dominated by the De Beers diamond cartel that forces everyone to sell through it. This allows the cartel to dictate the price, essentially setting it at a multiple of what it would be under normal competition. This cartel was put in place in the late 1800s to preserve prices after major discoveries in South Africa that suddenly increased a lot the diamond supply. When the cartel found it difficult to hold prices in the 1930s, it created the diamond engagement ring, the most successful marketing campaign ever as it created a must have for every fiancée. The latest marketing scam is that "diamonds are forever." Well, actually this is true, as it is extremely difficult to resell a diamond at a price remotely close to its supposed value as diamond sellers have to comply with the cartel. So you are stuck with your diamond forever.

Diamonds, the worst investment ever, now supported by the Belgian government.

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