Private Equity Wants in on the Bailout? Spare Me

Your assumption is kind of predicated on the belief that people lending to PE are making rational choices...they aren't.

The reason why LBOs took off was because S&Ls needed high-yield paper (and, to a lesser extent, there was a big buildup of Middle Eastern funds in US banks). All these deals allow the lender to risk up their portfolio, and take (in retrospect) equity risk. If you were an LBO firm, you can just sit there, create this paper...maybe it works out, it probably doesn't, and (tbh) you don't care because you get fees either way (most PE firms aren't really fund managers, they generate transaction fees for principals...that is why they employ bankers, instead of people with any experience of business). Btw, if this isn't convincing this same dynamic also caused a bubble in emerging market debt (i.e. banks needed high yield paper, bankers went to EM govts and got it).

And in a downturn, this process goes into reverse. People rush into cash, and sell whatever is liquid. It isn't anything close to rational (I feel like this should be obvious, I am seeing stocks with close to monopoly positioning selling at 3x earnings...is that rational?).

Now, the complexion of these deals has changed but what really drives finance is supply and demand. Another good example is CDOs, that was all supply-driven...banks wanted paper (there was a huge build up of dollars in exporters like Germany/Japan...China too but the state controlled dollars domestically), Basel rules meant there had to be some trickery i.e. banks needed to say CDOs were AAA but there was not enough AAA supply so CDOs had to convert junk into debt...but the point is...they needed the paper, so it was supplied. Totally irrational, no-one looked or cared about fundamentals but...the fundamentals don't really matter. Liquidity drives everything (if you have liquidity, you buy anything...if you don't, you sell anything).

Btw, understanding this is pretty key to successful investing. Once you realise what is occurring, investing is fairly straightforward. It is only when people try to introduce artificial concepts like rationality that they lose money in large sums.

>Quite a far stretch equating those.

In reality it really isn't.

The basic account of "trickle-down economics", goes something like this. When you give a tax cut to a rich guy, he uses the money to buy party supplies for a celebratory yacht party. The guy who owns the yacht party supply store sees an influx of cash from rich guys spending their trickle down tax cuts on yacht party supplies and orders a pizza to celebrate, and gives the pizza guy a big fat trickle-down tip. As you can see, the tax cut started out at the rich guy, but before long even the lowly pizza delivery guy is getting a piece of that sweet trickle-down cheddar.

Notice an interesting thing about this account: it is fundamentally a _demand-side_ story. In this story, the trickling down happens as a result of people spending extra money on goods and services. It is not about creating supply. So it's _not even an accurate representation_ of supply-side economics. People rightly point out that it's a flawed story, because poorer people probably have a higher marginal propensity to consume than rich people, so you'd be better off giving the tax cut or equivalent transfer payments to poor people if you want to stimulate economic activity. Well, yeah, no shit, that's because this is a complete straw-man and no economist actually believes that this story is true.

What some economists actually do believe is that the path to prosperity is via the supply curve and not the demand curve. Making things cheaper to make and cheaper to buy makes people better off faster than just giving them money to buy things at existing levels of production. And the way to do that is investment—investment meaning, in the economics sense, spending on things like factories and equipment. There is a huge body of theory and evidence to support this idea—higher levels of investment do lead to faster growth. So supply siders believe that things like taxes on capital gains are harmful to the economy on the margin because they reduce spending on investment, and may even encourage spending on consumption, which is a bad outcome to the supply-sider. They also believe in reducing barriers on production—things like government regulation and income taxes. They also believe in, you guessed it, helping make sure that corporations don't go out of business amidst a once-in-a-century black swan event — call it a "corporate bailout".