Today I heard what might be the most cogent argument against the RTC-like bailout being proposed by the Bush administration. It was given (no surprise) by Newt Gingrich. In essence, he does not like the idea of giving the government $700B to run around buying worthless investments. Given the propensity of congress to give money to their friends, the idea of allowing the government to spend that much on handing out cash in exchange for dubious investments is alarming.
Having said that, I still like the idea. I'm willing to make the leap of faith to think that there will be sufficient safeguards to protect us from the congress going crazy.
Additional posts worth reading: Robert Samuelson discusses how this is a crisis of confidence in the banking system. Banks are wary of lending each other money because their afraid the other bank is using garbage equities as collateral. It's like a financial game of hearts where no one knows who has the queen of spades.
Paul Kedrosky makes the great point that perfect is the enemy of good enough.
I'd love to hear what y'all think about this deal.
I'd love to have an intelligent opinion on the deal. However, a semester of economics in high school isn't really enough information to be able to assess something like this with any real know-how whatsoever.
We need to think through the longest term consequences of these actions. Here is a quote from the Wikipedia article on "The Road to Serfdom" by F.A. von Hayek:
"For Hayek “the road to serfdom” inadvertently set upon by central planning, with its dismantling of the free market system, ends in the destruction of all individual economic and personal freedom."
It is precisely the dismantling of free markets and the substitution of government power that has me so worried. We still live with the corrosive effects to the constitution wrought by the government interventions of the 1930s. Some of these interventions led directly to our current dilemma.
Absent guarantees that government will repeal the Community Re-investment Act, dismantle Freddie and Fannie, and have a time certain limit on unbundling the bad assets, I cannot support this bail out. And the fact is, once one starts down such a path, such guarantees are almost always broken by government anyway.
I'm really conflicted by this bailout.
On the one hand to let these giant compaines fail would produce massive losses for the entire economy (and, contrary to what the Englightened One says, that's probably a devastating thing for the mom and pop middle americans).
But on the other hand I don't like big government, I don't like the nanny state, and I really don't like the government getting involved with private markets.
Since you sort of asked us to choose, I guess in this case I think the first is worse than than the second, so with very lukewarm support, I'm in favor of a bailout.
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