take on the financial crisis
Howard Baetjer Jr.
Wednesday, October 1, 2008,
two days after the House defeated the first version of the bailout package.
Here is a quick summary of my take on the current turmoil and the proposed bailouts. You’ll see that I rely a lot on others’ work. I offer you below the best stuff I have come across for making sense of the current mess.
I believe that government intervention is largely responsible for causing the current mess. In a really free market, I just don’t think it could have happened, at least not so badly.
I rejoiced yesterday at the defeat of the bailout bill
· because I don’t think politicians and bureaucrats know enough to plan centrally a helpful response to the mess and
· because the incentives for special-interest-driven plunder and damaging unintended consequences are so great.
I think the government should stay out other than to do its essential job of protecting property and enforcing contracts. We should leave all the clean-up and readjustment to the impersonal forces of the free market—human actions based on property rights, contract, and consent—so as to call on the specialized knowledge of millions of different investors and borrowers and banks and courts, in a vast decentralized readjustment process disciplined by market competition, profit-and-loss feedback, and the consent of all participants. Such a process is likely to be painful and imperfect, but I think it will be much less painful, much quicker, and much more just than anything politically driven can possibly be. Resolution of this mess should be
· decentralized rather than centralized,
· profit-and-loss driven rather than political payoff driven,
· informed by vast quantities of local knowledge rather than the small amounts of statistical knowledge central planners and bureaucrats can marshall, and
· regulated by market discipline rather than by politically appointees, however “expert.”
Here is what I recommend that you read:
On the sorry history of government intervention that got us into this mess, read “Blame Fannie Mae and Congress For the Credit Mess” by Calomiris and Wallison. This is an op-ed from the Wall Street Journal. It will make you angry. [Update: On the same theme, read "How Government Stoked the Mania" by Russell Roberts.]
On the proposed bailout and why it might actually freeze up credit market worse, here is a wonderful Cato Daily Podcast by economist Arnold Kling. To listen online click the September 25th entry here.
This two-pager by Prof. Zingales of the University of Chicago is a bit beyond me but it helped me understand the finance better, especially the market-process alternatives to a bailout. Also the final paragraph is moving, terrific.
MOST HIGHLY RECOMMENDED is this wonderful, noble open letter by my friend Steve Horwitz of St. Lawrence University, who has written several articles about the way private initiative got around the government’s restrictions on money issue in the government-regulation-caused panics of 1893 and 1907. It’s long, but it’s awesome. I think it will reassure any of you who are worried (as I still am, a little, I confess) about leaving decisions to market participants rather than letting powerful men “do something.”
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