The bailout failed. Amazing. Thus drops the Dow with its largest one-day fall ever. No surprise there. I’ve been paying attention to what has been happening, but without the knowledge I needed to understand what I was hearing. So after this bailout failed today, I’ve taken some time to do some research into what was really proposed.
I started by trying to read the 110 page bill. I got to page two and was already lost. No help there. I then turned to blogs that helped clear up the my confusion. Mike’s blog provides a good summary of the meaning behind all the political BS of the bill. This blog entry also provides a summary of the bill.
After keeping an eye on CNN.com all day, I read this featured editorial article written by Jeffrey A. Miron, senior lecturer in economics at Harvard University. I would like to highlight a few points Miron makes.
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“This bailout was a terrible idea. Here’s why.
•The current mess would never have occurred in the absence of ill-conceived federal policies
•The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.
•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.”
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The alternative to the bailout is of course bankruptcy for lot of banks. Which at first sounds scary, especially with all the media hype. However, Miron points out,
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•”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.”
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This situation is basic economics. Markets always correct themselves. Up/down, positive/negative, less/more. Miron says this government intervention, this “moral hazard,” will ultimately create “enormous distortions in an economy’s allocation of its financial resources.” Thus creating unnatural events to occur in the market. Making it worse when the market attempts a correction.
Miron concludes,
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•”The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.”
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It’s a damn good thing the bill did not pass.
Here is a quote from Campaign for Liberty about what will happen now.
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Now the blame game will start. The market is currently dropping, and it will charged that we are responsible for it.
Nonsense.
The market is currently reacting to what just happened, and it remains to be seen what the final effect will be. The key is: despite all the doom and gloom predictions, despite all the threats of the coming apocalypse… we’re still here. The world is still turning. And as more days pass and the world continues to turn, the market may just settle back down.
Another charge that will be levied is that we are responsible for the pain people will feel if the markets go down.
Again, nonsense.
The federal government and the Federal Reserve are responsible for this mess with their excessive regulations, easy credit, and other money and market manipulation schemes. Today’s rejection was a rejection of further worsening the problem with the same intervention that got us to this point. Yes, there will be some pain because of what the government has brought about, but the rejection of further intervention will make sure that that pain isn’t made much, much worse for many more people.
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Do not help the government fix their problem.
