$700 Billion Bad Bet
The administration’s proposed $700 billion bank bailout has finally passed the Congress — in large part because of fear that the economy would crumble if “something” wasn’t done.
But the magic men in Washington don’t have any guaranteed fixes in their bag of tricks. Certainly robbing the taxpayers of $700 billion — that’s a billion, 700 times — won’t cure the economy.
It will, long run, hurt the economy. How? By hampering realistic adjustment to current market conditions. It means taking $700 billion from productive economic activities to buy up debt at prices nobody in the private market is willing to pay. As economist Arnold Kling points out, “If [Bernanke and Paulson] were taking their plan to a venture capital firm to seek funding, they would be laughed out of the office.”
How did we get here? In previous years, the federal government compelled banks to give mortgages to persons who really couldn’t afford them. Meanwhile, the easy credit policies of the Federal Reserve made it easy for banks to obey these irresponsible demands.
Hence the housing bubble. Which popped.
The only long-term solution is to get the government out of the market. Stop trying to paper over the horrendous consequences of past government interventions with even worse government interventions. The free market ought to be free. Otherwise, we’ll one day end up with no market at all.
This is Common Sense. I’m Paul Jacob.