The house rejected the bailout.

The Dow fell by almost 780 points.

I was surprised by the first, although I still think Congress will eventually pass some form of a bailout. They need 12 votes to pass the bill, and I think they’ll get those votes by tomorrow. Or maybe not, there’s not a lot of public support for the bailout.

But 780 is a big drop and the Dow will likely drop again tomorrow.

HT to Peter Boettke:

What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. (The Wealth of Nations, Vol. 1, p. 456)


Palin’s Problems

Kathleen Parker called for Sarah Palin to resign from the campaign in the National Review:

Palin’s recent interviews with Charles Gibson, Sean Hannity, and now Katie Couric have all revealed an attractive, earnest, confident candidate. Who Is Clearly Out Of Her League.

No one hates saying that more than I do. Like so many women, I’ve been pulling for Palin, wishing her the best, hoping she will perform brilliantly. I’ve also noticed that I watch her interviews with the held breath of an anxious parent, my finger poised over the mute button in case it gets too painful. Unfortunately, it often does. My cringe reflex is exhausted.

I have to say, I’ve had much the same experience. (Except I’ve not been so much pulling for Palin as resiting the urge to belittle her.)

Now, if I’m being charitable, I’ll say that it’s entirely possible that Palin is an intelligent, competent executive who simply underperforms in these situations. Oratorical ability and a facility for extemporaneous speaking are not actually necessary qualifications in a leader, an executive, or a president. Thomas Jefferson, for example, loathed public speaking, was known to mumble incoherently, and finally succumbed to submitting his State of the Union Address in writing: to be read to Congress by an aide. Jefferson wasn’t dumb.

Now, Sarah Palin is no Thomas Jefferson. But she’s also not a complete rube or buffoon. She’s the governor of Alaska and enjoys spectacular approval ratings for her work there. (How many times can I say that before I start to wonder about Alaska?)

Let’s just say that a lot is riding on her performance in the debate.

How big is that bucket?

I’ve seen more than a couple of people comment on the bailout by saying something more or less along the lines of what James Lileks said,

“I’m of two minds on the bailout – reasonable people object, but on the other hand, let’s not just wreck everything today because we want to stand on principles, okay?”

This drives me nuts.

I agree that principles shouldn’t be infinitely rigid. I acknowledge that the ethics of emergencies demands close attention to circumstances. I know that otherwise useful principles may actually become a hindrance in certain unusual circumstances.

But if we ditch our principles at the first sign of trouble, if we abandon our principles because it seems like we’ve got a shot at a quick short-term gain, well… then we’re not actually principled.

Principles matter.

It does us no good to pretend that this bailout will be different, or to argue that past bailouts demand future ones. Both are simple lies.

Congress will bail out banks and investment firms that made bad choices. The firms and banks that are stable, sound and well-run? They get hammered by the bailout. Reward stupidity, punish success. Bailout American auto-makers because they can’t sell cars and lose massive amounts of money? Why not? Reward stupidity, punish success. Homeowners who’ve built equity, made their payments and acted responsibly? Raise their taxes. Borrowers who’ve over-extended and defaulted on their homes? Bail, bail, bail. Reward stupidity, punish success.

Maybe I’m just too cynical…

But I agree with Arnold Kling:

The benefits of the bailout will be almost entirely private. They will go to the shareholders and executives of institutions that made unwise decisions. On the other hand, the financial system, in the sense of banks that can make loans to qualified borrowers, can be saved using other tools. Again, I recommend lowering capital requirements for new bank loans going forward.

The problem with lowering capital requirements is that the benefits are broad-based. There is little or no rent-seeking traction to be gained in lobbying for them.

More good stuff from Ilya Somin:

…the basic sentiment that we should now follow FDR’s example and take swift, decisive action in the current crisis is one that is widely shared.

In considering this view, it’s worth recognizing that many of the massive, decisive government interventions that FDR and the New Deal Congress enacted actually made the situation worse. As I discuss in in this article, the administration and various interest groups used the crisis of the Great Depression to enact sweeping legislation that benefited themselves at the expense of the general public, sometimes in ways that made the crisis worse than before. In these efforts, they were abetted by voters’ sense of desperation and widespread ignorance of economics and public policy. This made it easy to portray measures that benefited narrow interest groups at the expense of the general public as “emergency measures” needed to address the crisis. (Emphasis added.)

Market Signals

It occurs to me that a number of people are concerned about bailing out failing financial firms because they’re afraid that their 401(k) investments are going to go south. Or that people who support the bailout realize (as do I) that “investors” getting bailed out are not just the executives at financial institutions, but the men and women who’ve entrusted their retirement savings, Christmas funds, and college savings to these same financial institutions.

I get that.

Many of those people will be hurt by losses in the market, although I don’t think the losses are likely to be as catastrophic or as lengthy as the doom-sayers seem to.

The point that I would like to push is that those losses are the necessary part of a market correction. The problem is not just that some executives played fast and loose with lots of money and took huge risks, but also that a huge number of Americans blindly put their trust in firms and willingly accepted the risk of investment. We got used to huge returns in the market and came to expect that investment was low-risk. But it’s not.

Part of the point of a market correction is that it provides information about risk. When investment firms evaluate risk, they’re making estimates. If those estimates are wrong, then the investment firm loses money. Sometimes, a lot of money. But the only way to calibrate the estimate of risk is to allow the incorrect estimators to lose their money and to allow those who guessed right to profit. The market correction is necessary partly because it tells us that everybody has been underestimating the risk of investment.

If we bailout the investors who took too much risk, then we fool ourselves into believing that we can eliminate risk. And that just means that we’ll continue to underestimate risk.

Voter apathy

Ilya Somin has a great post up at Volokh.

Voters tend to overvalue the importance of new information that supports their preexisting views or makes their preferred party look good; and they tend to discount any information that cuts the other way.

This intuition is confirmed by studies showing that people tend to use new information to reinforce their preexisting views on political issues, while discounting evidence that runs counter to them . . . Although some scholars view such bias as potentially irrational behavior . . . , it is perfectly rational if the goal is not to get at the “truth” of a given issue in order to be a better voter, but to enjoy the psychic benefits of being a political “fan.”

How do we get out of the dangerous box in which public policy is determined in elections where most voters are either rationally ignorant about even basic political information or highly biased in their evaluation of what they do know? There is no easy answer to that question. In the article linked above and in some of my other scholarship (e.g. – here), I suggest that we consider making fewer decisions through the political system and more through free markets and civil society – where people have much stronger incentives to both seek out information and evaluate it at least somewhat rationally.

It’s a great article because and I agree with it.

Bailout or no bailout?

As readers might have guessed, I’m not a big fan of the bailout proposal. But I do think it will pass. Why? Because without a bailout there will be a market contraction and a lot of people will lose money. If Congress does nothing, well, then they’ll get the boot in November. So some form of a bailout will pass. And we’ll still have a market correction, market incentives will be compromised, the efficiency of the market will diminish and we’ll all be worse off than we would have been otherwise. But Congress will have done something!

The bailout rescues some people by penalizing others. That’s the way it works. There Ain’t No Such Thing As A Free Lunch. When the government picks the winners and the losers, they do a bad job of it and long-term, more people end up losing than winning.

To quote from a petition signed by 192 economists

The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

Peter Boettke says it well:

The market economy is a profit and LOSS system. Imprudent decisions do require correction — if not by the individuals themselves, then by others who enter into the market in the hope of realizing the profit opportunities others are mistakeningly leaving on the table. This is how markets work; this is how markets self-correct. The self-correction properties of the market economy is perhaps the most important lesson of economic science (not an issue of faith) that must be communicated to the general public. Unfortunately, this fundamental truth of economic theory is one of the first casualty of crises.

Besides the economics, there is also constitutional and ethical issues that should be considered when such sweeping legislation is proposed. Consider the classic essay “Not Yours to Give” by Davey Crockett. There is also a consequentialist issue at stake. A free society works best when the need for the policemen (read in this case regulator) is least. Individuals must be equiped to embrace the troubles of thinking and the cares of living if they are to live free as a self-governing citizenry.

The consequences of our current policy path are dire in terms of economics, politics, and freedom.

Russ Roberts at Cafe Hayek:

The White House is trying to argue that the bailout isn’t so bad, it might not really cost $700 billion because some of the assets will appreciate in value. …

But from my perspective, the budgetary gains and losses are a trivial part of the story. Those are a transfer from taxpayers to the current holders of the assets. My real concern is the incentive effects for future prudence (reduced) and the weird misallocations of capital that will inevitably result. I also am deeply concerned about the rule of law and how such a program can possibly run in a non-arbitrary way.