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Monday, September 29, 2008

Bailout package fails: Free market opinion round up

The news: The $700 billion dollar bailout package for Wall Street got voted down by the House. Here's the roll call of the vote, and here's the BBC, CNN, and Yahoo on the news.

The Cato Institute responds:

Daniel J. Mitchell: "The current turmoil in financial markets is the result of bad government policy, particularly easy-money policy by the Federal Reserve and unsustainable subsidies to housing by Fannie and Freddie.

The bailout did not address these problems. Instead, it sought to compound the problem by increasing government intervention."

Jagadeesh Gokhale: "Overall, it's not a pretty picture--but score one for supporters of the free market who insist on allowing market reorganization of the financial sector to continue unimpeded...albeit at high risk to the economy over the next few months."

The Mises Institute (happy birthday, Ludwig von Mises), via Jeffrey Tucker:

"A magnificent repudiation of the Fed, the Treasury, Bush, Wall Street welfarists, inflationists, and stabilizers of all sorts. The costs of what the Fed has already done are going to be massive and felt for many years. But at least Congress has so far, and this time, not participated in the evil.

It's a great birthday gift for Ludwig von Mises.

Whatever the case with stock markets--and we can be confident that whatever prices emerge are truer than they would be with a bailout--it is fantastic that oil prices have retreated so dramatically. Drivers cheer. How this can be spun as dreadful news is beyond me."

The Competitive Enterprise Institute on their blog, OpenMarket.org:

"Oh, Happy Day! And it certainly is for all those who value freedom, responsiblity and the true free market in which individuals are free to profit from their risks on the condition that they don’t stick the rest of us with their losses.

It’s not hyperbole to say the Republican and Democratic backbenchers who defied both parties’ leadership to defeat this $700 billion package of Wall Street socialism literally saved America. Whatever their reasons, this defeat (or rather victory for freedom), means that America is much less likely to turn into France, Venezuela, or the old Soviet Union, as this bailout/nationalization package would have set us on the road to becoming."

And here's Jeff Flake, the Arizona Republican, and possibly the best Congresscritter in the U.S., on why he voted against the bailout (h/t reason's Hit & Run):

Posted by P.M. Jaworski on September 29, 2008 in International Affairs | Permalink

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Comments

Even a vomiting drunk knows when to stop. My only hope is that this will be a step in the right direction toward reestablishing fiscal responsibility in the states. Whether the looming tide of regulation will be dampened, time will tell.

Posted by: Condor | 2008-09-29 2:39:20 PM


I hope so, Condor. One benefit of this problem is that a lot of people may be reminded of the importance of small government and fiscal discipline.

So long as this latest disaster doesn't get spun as a problem of a market with insufficient regulations and insufficient bureaucratic oversight, we should see a resurgence of free market policy.

But I'm a (possibly naive) optimist...

Posted by: P.M. Jaworski | 2008-09-29 2:42:42 PM


It was the overindulgence of the free market that caused the problem, P.M. I'm all for free markets, just as I'm all for democracy, but that doesn't stop me from being frustrated when mismanagement on such a massive scale comes home to roost. Bubbles always burst, and this bubble formed for the same reason others do--simple, old-fashioned greed.

It would be a nice thought that the high rollers will learn from the experience and proceed with more restraint in the future. But unfortunately each new generation of entrepreneurs prefers to learn things the hard way.

Posted by: Shane Matthews | 2008-09-29 3:12:51 PM


I hope so, Condor. One benefit of this problem is that a lot of people may be reminded of the importance of small government and fiscal discipline.
Posted by: P.M. Jaworski | 29-Sep-08 2:42:42 PM

A lot more people will probably be reminded that their 401K's are worth half now than what they were two months ago.

Posted by: The Stig | 2008-09-29 3:21:16 PM


Shane,

I would posit that it is political interference that has caused this situation, not the free market.
Why did the democrats essentially force the banks to issue sub-prime mortgages?
Why did the democrats cover up Freddie's and Fanny's problems when e.g. the republicans wanted better oversight?

I am sure there is an element of incompetence too (within the banks), but that is secondary.

Regarding the defeat of the bill, I am divided. My free market soul is of course happy, but at the same time I worry for my retirement funds and real estate assets. Like most others, I suppose.

Posted by: Johan i Kanada | 2008-09-29 3:29:33 PM


Shane, we do seem to repeat mistakes don't we.

Re the overindulgence of the free market, I think the market will always do this. And the more the government stays out of the free market, the more individuals will take responsibility for their own affairs. When greedy banks can extend more credit than they would if they were using their own money, they will. Thank the government for that. But Joe six pack is just as greedy, and no wiser, when he takes out a mortgage for 100% of the value of a house in a bubble market.

I don't think you are blaming the market for this, but some people are. Too bad. The market is not perfect, but when governments get involved, things are never better than if they didn't.

Posted by: TM | 2008-09-29 3:29:37 PM


Why did the democrats essentially force the banks to issue sub-prime mortgages?
Posted by: Johan i Kanada | 29-Sep-08 3:29:33 PM

You must be joking.

Posted by: The Stig | 2008-09-29 3:39:09 PM


On the other hand, TM, it cannot be denied that depressions have gotten a lot less painful since the government and other organizations tried to keep a better handle on capitalism's pettier excesses. No depression since 1929 has been as long, or as deep, or as devastating since the Great One. Of course the Great Depression wouldn't have been as bad if the U.S. hadn't raised tariffs that doubled unemployed and reduced worldwide trade by two-thirds.

Within reasonable limits, I'm okay with the government telling companies, "You can't do that; it's unsafe; it's dishonest; it's fraud." Where I start to get antsy is when the government starts to say, "We know better than you. So you have to do it this way."

Posted by: Shane Matthews | 2008-09-29 3:40:48 PM


P.S. Because, as the Great Depression proves, when Wall Street crashes, it doesn't go down alone.

Posted by: Shane Matthews | 2008-09-29 3:41:52 PM


Personally, I was for the bail out, notwithstanding the fact that I believe in free markets and smaller government.
Free enterprise did not cause this mess. It was conceived by the Clinton Administration in 1999 and picked up by a bunch of greedy thieves who were basically handed the keys to the treasury.
In this case, the implications are huge and having the philosophy that government is responsible for the protection of it's citizens interests, it was an appropriate thing to do.
A hard pill to swallow to be sure, but the alternative is worse.
Both sides are guilty of allowing this mess to continue, however Pelosi's speech made it into a partisan affair. She brought partisan politics into it and the GOP reacted in like kind.
Very sad but not unexpected from the C**t from California.
If Canadians don't think it will effect them, just take a look at the TSX today. How's your RRSP's doing now?

Posted by: atric | 2008-09-29 3:48:59 PM


Condor has it right This drunk knows not when to stop. Actually, in Euros the "bail out" is only $483 Billion Euros. The mighty dollar is not what it used to be...Blanche Dubois and George W. Bush depend on the charity of the Chinese, Japanese, Taiwanese, Korean et., etc.,

Posted by: Phils Islas | 2008-09-29 3:56:38 PM


this is turning out to be a good day. this is what responsibility looks like. at least the market can start to fix itself.

Posted by: krista zoobkoff | 2008-09-29 4:01:01 PM


Shane, some people see the government more like poison than medicine. With medicine, sometimes it help you. With poison, even a little is not a good thing. For someone who is not fully in support of a free market, you have a pretty open mind.

For every good the goverment allegedly has done before, during, and since the great depression, there is ample evidence that the good was in spite of, not because of them.

The natural cycle of things hurts some. But letting it be is the healthiest way to go in the long run.

Posted by: TM | 2008-09-29 4:44:45 PM


I would posit that it is political interference that has caused this situation, not the free market.
Why did the democrats essentially force the banks to issue sub-prime mortgages?
Why did the democrats cover up Freddie's and Fanny's problems when e.g. the republicans wanted better oversight?

I am sure there is an element of incompetence too (within the banks), but that is secondary.
Posted by: Johan i Kanada | 29-Sep-08 3:29:33 PM

I'll second that thought.
The government simply has no business...in business. Neither does the Fed or the Central banks of the other western nations.

Posted by: JC | 2008-09-29 5:00:14 PM


What was the mood on the house floor today?

http://www.youtube.com/watch?v=lFh6PU6qM9Q&eurl=http://www.campaignforliberty.com/

Posted by: JC | 2008-09-29 5:31:05 PM


I just wish that Barney Frank , Obama and all those other clowns that not only let this happen, but accepted money from the culprits in this mess eventually get their just desserts. Unfortunately, except for Fox news playing clips of the Dems. sticking up for the Fanny and Freddy's and claiming that all was well in 2004, all other media seems to be ignoring the Dems. fingers stuck in this cookie jar.

Posted by: Markalta | 2008-09-29 5:53:06 PM


As Robert Bidinotto writes:

"When the Bush Administration tried to rein in Freddie and Fannie from continuing to engage in risky practices, guess who stepped in to block their efforts? Democratic senators Chris Dodd, John Kerry, Hillary Clinton, and — Barack Obama.

Meanwhile, guess who were the top four recipients of campaign contributions from Fannie and Freddie between 1988 and 2008?

Senators Chris Dodd, John Kerry, Hillary Clinton, and — Barack Obama"

Power corrupts etc...

Posted by: Johan i Kanada | 2008-09-29 9:45:45 PM


From CNN:

http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html

In contrast, 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.

Posted by: JC | 2008-09-30 6:23:56 AM


Shane,
If you are convinced that the free market caused this crisis, you ought to read Dr. Steven Horwitz's letter to his friends on the left that was posted to the Shotgun last night here:
http://westernstandard.blogs.com/shotgun/2008/09/a-letter-to-the.html
because it's a great and difficult to refute explanation as to why that is simply not the case.

Posted by: Janet | 2008-09-30 7:38:13 AM


It's not that greed caused this mess all by itself, Janet, so much as it is that the greed went unchecked for so long. This crisis is mostly to do with the cost of housing, which has been artificially high for years. Rather than allow sales to stagnate for want of buyers and face the temporary lean times that would result, banks and credit unions merely responded by making credit easier to obtain. Down payment? No longer required. Can't afford the payments on a 25-year mortgage? Try a 40-year model.

Basically, what the banks did was construct their house of cards vertically, instead of horizontally. Instead of strengthening the base by building out, they built up, overburdening the base, to the point where the whole mess came tumbling down. This is the classic economic bubble, and it follows a predictable pattern every time. There was very little in the way of government regulation in 1929, when the biggest bubble in history burst and cast the world into the Great Depression.

The free market is the best economic system available, cultivating the very best in human talents and instincts. Unfortunately, it also has the potential to cultivate the very worst. It does benefit from checks and balances, as do democracy and liberty. Free speech is good, but does not justify shouting fire in a theatre. Democracy is good, but does not justify mob rule. Free markets are good, provided measures are in place to curb their pettier excesses. And so they are. This long-overdue correction will be nowhere near as bad as the Great Depression.

Posted by: Shane Matthews | 2008-09-30 10:34:03 AM


Excerpt from the NY Sun:
http://bigpicture.typepad.com/comments/2008/09/regulatory-exem.html

"The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch.

The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.


Greed? Yes. Government sponsored greed that is...

Posted by: JC | 2008-09-30 11:14:58 AM


The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.
Greed? Yes. Government sponsored greed that is...
Posted by: JC | 30-Sep-08 11:14:58 AM

In a libertarian world there would be no government regulation. So what makes you think the five firms would they would have done anything differently? It can be fun going to a casino when you're betting with someone else's money. Everything on red.

Posted by: The Stig | 2008-09-30 11:21:38 AM


Its my "opinion" that a free market provides its own discipline with checks and balances.
Its also my "opinion" that when large stock holding and lending firms operate with the tacit knowledge that government will bail them out that they become entirely irresponsible.
And its obvious that fiat currency and credit expansion under a central (unnacountable) bank is a time bomb. And it just blew up.

Posted by: JC | 2008-09-30 11:33:44 AM


AND!...In a Libertarian world they would be charged with fraud and jailed. Not quite the Golden Parachute, but it will do.

Posted by: JC | 2008-09-30 11:36:27 AM



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