The Philosophy of Bailout

Jeffrey A. Miron is was one of the 166 economists who wrote Congress last week telling them how bad of an idea this “bailout” is.

"The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, 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."

Bail Out Tyrrant In

here's my unqualified take of the world from my vantage point .

.. power has been removed from the low mentality of the masses ... the common people are being rapidly reduced to poverty and slavery ... the experiment is now finished ... and as a result whatever freedoms have been acquired by the wise and diligent will be maintained, while the rest who have chosen to live in ignorance and waste will find themselves sorely compromised in health and happiness as always ... while blaming those who are more worthy of their successes and hating them and their possessions.

Take a good look at Paulson in my latest Absolute Rubbish post ... he's the new Czar and will probably be ruling with an iron hand ... The Constitution in defunct, the oligarch is in power and the sheeple are non the wiser.

What side of the equation are you on?-