A $700,000,000,000 bailout of the ‘troubled’ financial sector failed a House vote yesterday. God willing, although we’re probably not so lucky, no rescue package will ever see the light of law.
The cries against the bailout seem to be getting louder or, more likely, simply more attention. And they should because the bailout is a terrible idea.
[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.
Further, the current credit freeze is likely due to Wall Street’s hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.).
Let financial institutions fail, merge or be bought out. The faltering institutions will see their shares devalued and will be likely to be taken over by stronger institutions — as has already started happening. This consolidation of the financial sector is both efficient and inevitable; government action can only delay the adjustment. , which also makes good points.
Bankruptcy and consolidation in the financial sector is not a bad thing. Not with the way credit has been flowing. This country can afford, nay needs, a slow down. Sustaining the current lending spree is absurd.