Passing Thoughts on “Bailout” Debate

Passing thoughts on the “bailout” debate…. John Hawkins at Right Wing News:

If the history of government intervention in this country has taught us anything, it’s that we should be much more afraid of the long term ramifications of the government rushing through an emergency “solution” to a problem than the actual problem the government is trying to “solve” in the first place.

Agreed. In that spirit, the Heritage Foundation has an excellent piece urging Congress to live up to its “deliberative” role in this debate.

Meanwhile, Rossputin has recanted his initial tentative support of the administration’s $700 billion bailout plan, writing:

[Federal Reserve Chairman Ben] Bernanke is warning us that doing nothing poses serious risks to the economy. Indeed, I believe that’s true. But doing this bailout and doing nothing can’t be our only two choices.

On this question, I say we should again look to the Heritage Foundation, which correctly urges Congressional lawmakers to seek the following goals:

• Don’t prop up failed institutions
• No price supports
• Don’t allow the government to become permanent “owner of last resort”
• Limit legislation to the immediate need and don’t let it become a Christmas tree of special interest goodies
• Avoid (or at least limit as much as possible) “moral hazard”
• Carefully define the Federal Reserve’s role as “lender of last resort”
• Limit taxpayer exposure and keep actions temporary
• Assure market liquidity but make sure insurance prices reflect market risk

These are good principles to judge any Congressional action by. The choices aren’t between the Paulson Plan and nothing. As a general rule, government intervention is to be avoided, but as the Heritage report wisely points out:

But there can be rare situations in which a wave of bad decisions in one sector has such dire consequences for the most basic operations of the economy that other sectors are threatened, jeopardizing the functioning of the entire economy. We are in such a situation. And in these rare cases another principle comes into play: Government institutions have a critical role in helping to assure the integrity of the market’s infrastructure, from the sanctity of contracts to the liquidity of the financial markets. When government fails to carry out this role in critical times, such as its failure to maintain liquidity after the stock market crash of 1929, the results can be catastrophic. As economist Milton Friedman explained, the failure of the Federal Reserve to maintain liquidity and functioning credit markets helped trigger and deepen the Great Depression.

Let’s just make sure it’s done right — and with Congress in charge of seeing it done right, I don’t have much hope or confidence. That’s where I am right now.