Sunday, October 12, 2008

Sowell on Bailouts

Fannie Mae and Freddie Mac do not deserve to be bailed out, but neither do workers, families and businesses deserve to be put through the economic wringer by a collapse of credit markets, such as occurred during the Great Depression of the 1930s.

Neither do the voters deserve to be deceived on the eve of an election by the notion that this is a failure of free markets that should be replaced by political micro-managing.

If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out.

It would be better if no such government-supported enterprises had been created in the first place and mortgages were in fact left to the free market. This bailout creates the expectation of future bailouts.

Phasing out Fannie Mae and Freddie Mac would make much more sense than letting politicians play politics with them again, with the risk and expense being again loaded onto the taxpayers.

Thomas Sowell, "Bailout Politics"


ADDENDUM (Oct. 15th)

Terence Corcoran on bank "rescue":

So this is the new bold shift in the boundaries between state and markets. Governments force banks to take up new capital, including government as investors, under mandatory instructions to deploy money to borrowers, especially borrowers with riskier profiles.

This is how the United States got into this mess in the first place. It sent the world financial markets reeling through trillion-dollar subprime mortgage lending schemes, mandated by Congress, funded by government agencies and allowed to spin out of control by politicians and regulators who knew what was happening all through the last five years.

Is it possible to bail a financial system out of crisis using the same policies that created the crisis? A lot of people seem to think so, so then I guess we are, indeed, all home free. A new economic order has been created, the state is in control, and the crisis is over.


ADDENDUM 2 (Oct. 16th)

And Peter Foster on "The Nudge Doctrine":
With panicky governments jerking the levers of macroeconomic control and finding that they are not connected to anything, the notion that policymakers might expand their role by delivering gentle, benevolent, psychologically-savvy "nudges" seems less frightening than hilarious.


There is no doubt that a better understanding of human nature would improve policymaking, but among the most dangerous and underexamined aspects of the human psyche are the will to rule and to seek power and status by political posturing "on behalf of" others. That is the chimpanzee in the room that the Nudge Doctrine misses.