Market vs. Bailout

**A note from The General's Libertarian Friend:

As you know from our (almost heated) exchanges at the time, I think this was a tremendous misjudgment on the part of Mr. Paulson, Mr. Ryan, Mr. Becker. The damage to our free enterprise system of saying it needs to be “bailed out” was obviously going to be – and has proven to be – enormous and long-lasting. Just accepting the premise that the government can do better than the market at allocating resources makes it all but impossible for principled pro-market arguments to prevail in the future.

Free market adherents simply cannot say, “I favor the market except when the experts tell me there’s a big problem requiring government assistance,” and expect to be taken seriously in the future when arguing that some other idiotic interference in the market is a bad idea. Once you open the door to saying that there is such a thing as a “market failure,” you have forfeited in the public mind the right to object to the government fixing every market “failure” that someone declares to exist.

Now, as to this “crisis,” yes, there was a problem, or actually a bunch of government-created problems consisting of interference with the credit and housing markets – compounded enormously by the panic that was caused by Bush, Paulson, McCain, Obama, Frank, Becker, and a bunch of others saying, “There’s a great big problem here and it’s so bad we can’t even tell you what it is because it would scare you to death and set off a panic.” Duh, that was reassuring.

Now, you had a problem with (1) artificially inflated housing prices that needed to come down, (2) excessively risky loan portfolios had dropped down below their “true value,” (3) a government system concentrating the risk in just two major players (Fannie Mae and Freddie Mac) in the mortgage market, (4) a Federal Reserve (working in conjunction with the Treasury) terminally addicted to trying to micromanage the economy through interest rates and the money supply, and (5) lenders were excessively afraid to lend.

Now, here are some solutions to these five problems: (1) The market, (2) the market, (3) the market, (4) the market, (5) the market. You tell me why – certainly no one else has ever tried and I predict you won’t either -- there is ANY government solution that is better than the market for these five problems.

(1) Housing prices are “too high.” Well, the market can decide what the right price of a house is far better than any bureaucrat I’ve ever met.

(2) Risky mortgage bundles were priced “too low.” How the hell did anyone know this? “Too low” is a market judgment and the market was saying, “these things are toxic.” So the prices needed to go down. And the reason for stopping the market from doing its pricing job was -- some of the fools who bought these things might go bankrupt? So what? That is not a rhetorical question. So what? That’s what bankruptcy is for – the loan bundles could have been sold off in bankruptcy at a fair market price. (I actually know the bureaucrat who was assigned responsibility within GAO of monitoring the pricing of the TARP portfolios – back when they expected to have portfolios – and he was very open in saying that he couldn’t imagine how the government was going to be able to do that)

(3) Concentration of mortgage market risk in the Macs. Solution – stop doing that, abolish Freddie and Fannie, and let the market spread the risk among many players, any one of which could go bankrupt without a problem.

(4) The Federal Reserve trying to maintain a steady state economy by manipulating interest and currency – Solution, a steady medium of exchange (probably a money supply tied to GDP) so that the market can efficiently price goods, without trying to ensure there are no “losers.”

(5) Lenders were “too afraid” to make loans that made “good business sense.” Oh sure. And the government knows better than the people who have the money to lend what makes good business sense. Don’t tell me that the market couldn’t have solved this one in short order. Banks would have been happy to lend, at a fair price. But the Fed had convinced the businesses of America (and the world) that they had a God-given right to cheap credit forever, so the prices that the banks would have charged would have led to the bankruptcy of businesses who had bet their existence on interest rates never going up in risky times. That mind-set that cheap credit will always be available (caused by problem #4) obviously has to be corrected – even Obama and the liberals agree to that – and the market is the best corrective I know. What the Fed has been doing under Greenspan was every bit as arrogant Big Government (and every bit as damaging) as Keynes at his worst.

Now, knowing to an absolute CERTAINTY that junking the free market system in September 2008 would damage arguments in its favor for generations to come – damage that will literally cause the deaths of millions of children in sub-Saharan Africa, Bangladesh, and other economies on the survival margin – means to me you’d better be absolutely damn certain that what you’re doing is better than the solution the market would produce to the short-term problem in September 2008.

But not one economist or politician or analyst that I heard talking about the September 2008 bailout ever discussed the damage the so-called solution would have. All they would do is look at the mess the government had created by interfering with the market and say “well, that’s unacceptable, we’d better ‘do something.’”

This failure to make any effort to tell the public the costs and benefits of the government “solution” and the market solution (no quotes needed) was immoral. A corrective had to happen but the politicians were unwilling to tell the public that. So instead, they made the problem worse by many orders of magnitude than just letting the market work.

It was a level of irresponsibility that infuriates me to this very day and probably will for the rest of my life. To have had Republicans destroy the free market system … I just find it hard not to get angry about that.

And I’m sure not sympathetic to arguments that what Obama and his crew are doing is somehow worse than having our free market party wave the white flag of surrender.