Tuesday, September 23, 2008

Bailout and Ideology

False Debate Over Government vs. Markets - Fareed Zakaria, Newsweek

The lesson of the almost 100 (smaller) financial crises of the past three decades is that only government intervention can stabilize the system when it chokes.

Some problems require more regulations. Firms that are deemed too large to fail should also be deemed too large to be leveraged at 35 to 1. Some problems require better regulations. For instance, the rule forcing financial institutions to mark their assets down to "market prices"—even when these are distressed prices and firms do not intend to sell the assets any time soon—created a crazy downward spiral. Still other problems require less state intervention.

Of Interventions & Conservative Principles - Don Luskin, National Review

To arrive at a principled view on this intervention, we must answer three critical questions: Is it necessary? Will it work? And even then, is it morally justifiable?

...throughout history we have periodically gone through convulsions worse than today’s and survived them without such interventions.

With each intervention the banking crisis has gotten progressively more severe. Experts differ on this, but it is my professional judgment that these interventions actually made matters worse, because of the unintended consequences that were nearly impossible to forecast at the moment of decision.

...It also seems at first blush that the government ought to not bail out banks that made terrible investments they now regret. But remember, many of these bad investments were the result of government meddling. ... Shouldn’t the government shoulder some responsibility for its own mistakes?

Commenter David Walser at Megan McArdle's blog

Even if we could hold some players as responsible for their own fate, too many institutions are at risk of failure on account of risks they could not have anticipated nor avoided. Suppose your house burns down. As a general rule, I'd say that's your tough luck. Your insurance company will take care of you -- if you bought insurance. But suppose you did buy insurance, but the insurance company has been bankrupted with the assistance of the state insurance commissioner. Worse, your house caught fire because the building two blocks away went up in flames. The flames spread to your house because the buildings surrounding yours were not up to fire code (the building inspector was bribed).
Still, the fire department could have put the fire out before it reached your home, but the fire main had inadequate water pressure. In such a case, no one could blame you for not having prevented the fire or for failure to insure yourself. Still, you'd have no claim on our resources to bail you out if it were not for the government's role in so many of the factors that led to your loss.

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