Friday, September 26, 2008

For or Against?

The bailout that is. I will grudgingly accept, for the sake of argument, the claims that Ben Bernanke and Henry Paulson looked into the abyss last week and decided it had to be done. Still, it is on balance a bad idea. (But the realist in me thinks that Sec. Paulson is thinking about this first from the point of view of Goldman Sachs and the investment-banking industry, and only secondarily as the secretary of the Treasury of the whole country.)

The most important requirement right now is to set the rules of the game once and for all. The primary reason the Great Depression was as bad as it was not that there had been a financial collapse in 1929 - those were commonplace, and a year or two later normality was always restored. The problem was the new cure for the disease - the panicked handing over of immense power to FDR, who used it arbitrarily and socialistically (in the sense of giving the state the power to set prices, change the rules of the game faced by property owners, etc.) Depending on what he had for breakfast, a bank might or might not get taken over, an industry's freedom might or might not come under the control of the NRA, a new federal agency might or might not be established.

Even if the proposed taking over and selling off of all the bad debt were overseen by a wise philosopher-king with dictatorial powers, I might be against it because of the moral-hazard problems. But we have to think about the world we live in, and the people overseeing this massive new government intrusion into the financial system will not be Platonic public servants but Barney "We are not facing any kind of crisis" Frank, George W. "I hate high taxes but I love to expand federal spending" Bush, Christopher Dodd, etc.

Already the government's behavior has been completely ad hoc - Bear Stearns and AIG get saved, Lehman doesn't. The bailout will open the door to more arbitrary changing of the rules, crippling the ability of entrepreneurs and financiers to know what the rules are. Accounting rules may be X one day, -X the next; lenders may be required to favor American borrowers one day, subsidized to invest in Israel or Southern Africa the next. And most if not all of those changes will be in the direction of greater government control of free individuals in the market - controls on executive pay, the political hammer brought to bear to force lending to favored groups (the thing, remember, that helped get us into this mess), and other things political entrepreneurs will come up with that don't even occur to me now. Painful though the current situation is, the only sensible choice if we are to hold the line against further collectivization of our economy - and hence of our freedom itself - is to endure the pain, and to tell economic actors unequivocally that there will be no bailout, so that they can get on with the dirty work of taking out the trash.


Post a Comment

<< Home