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.
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.
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.