One Path Leads To Hoplessness, The Other to Utter Despair

I’ll confess that the more I stew over whether or not to hope this bailout takes place, the more I feel like a sort of Buridan’s Ass in reverse: equally repelled by both options. With a hat tip to Bill V., we offer an item from CNN in which Harvard economist Jeffrey A. Miron tells us why its a bad idea. Mind you, he’s a libertarian, and while I like my liberty, I still see a broader role for government than does the average hardcore libertarian, who generally seems to want the borders defended and not a whole lot else.

We read:

… [A] bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street’s hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration’s claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

Do I know what we ought to do? No, I certainly don’t. This proposal smells awfully bad, though, and perhaps if we just don’t go through with it, a little serious pain will teach the markets, and all the rest of us too, a lesson we badly need to learn.

This sort of thing is why I am not in politics myself, but am content to hoot and jape from the sidelines.

Read the whole thing here.

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