Wednesday, September 24, 2008

Financial Crisis: a free-market solution?

Government has a role in "steering" the economy, but when it interferes directly it often causes more problems than it solves. A trillion dollar bailout is wrong in so many ways. So what, if anything, should the government do? Here is some ideas from Edwin Feulner at

A Free-Market Fix
[...] Let’s begin by noting that there is a legitimate federal role in extraordinary circumstances. There are things Washington needs to do to keep our economy functioning. For example, it was a smart move for the Federal Reserve to pour $150 billion into the system. The Fed exists, after all, to make sure money keeps moving and credit remains available.

But as lawmakers debate buying up hundreds of billions in assets, they should realize that the government’s aggressive meddling in financial decision-making is what got our economy into this mess in the first place. The long-term answer isn’t more federal control, it’s a return to free-market principles.

One way to do so is to make sure that any bailouts are as limited as possible. If a private firm is so integral to the financial operations of the economy that it requires assistance, so be it. But in that case, the taxpayers’ should be investing as little as possible, and company employees and stockholders should suffer the consequences of their bad investments.

Also, lawmakers should avoid turning the rescue package into a Christmas tree, loaded up with goodies for special interests. One proposal in a Senate bill would require 20 percent of any profitable transaction to be deposited into a special fund that pays for low-income housing. That’s a silly idea that would, in the long run, only serve to make things worse. [...]

(bold emphasis mine) It goes on to demonstrate some "silly ideas" and shenanigans that have gotten us to this point, and allowed this to happen. If the government has a role to play at all, it should be watching out for the interests of taxpayers, not saving corrupt institutions at taxpayers expense.

We keep hearing about the projected costs of a bailout. What about the projected cost of no bailout? How can you make a rational judgement about the answer to the one question without also knowing the answer to the other?

What about a third option; a limited bail-out, that does some damage control, but does not protect the unscrupulous? We have more options than just a choice between a trillion dollar bailout, or nothing.

No comments: