On Last Week’s Bailout (and Our Future Headache), Part II

To me, the greatest problem is the power we are investing the Treasury Department with.  One central planner (granted, there is allegedly some congressional oversight in this scheme) has been given a huge amount of unprecedented power to purchase overvalued assets at overvalued prices.  The taxpayer takes the loss.  The philosophical, moral, and ethical assumptions are staggering, not to mention the disturbing precedent set.

We are told the market could not remedy the situation.  This is hogwash.  The market would gobble these assets up at their true prices.  Yes, real estate prices would fall, which would affect home owners and realtors.  Yes, interest rates would go up as credit tightens, which would affect loans of all varieties, and associated businesses.  Yes, there would be people whose home equity lines of credit will give them an upside-down mortgage.  Yes, there would be those who cannot afford their variable-rate mortgage payment and end up leaving their house for a less-expensive alternative.  (But consider how much easier it would be for them to find housing if the prices decreased to represent the true market value, rather than an inflated price.)

There would be pain in the short-term in such a case.  But if the government got out of the way, recovery would be swift.  Within a year or two, things would hit bottom and start climbing up.  Under an Obama administration, recovery, which should occur, will be slow and gradual.  After four or eight years of Obamanomics, most Americans will still be feeling the crunch.  Barack Obama and the statist status quo (McCain and the GOP included, of course) do not understand that central economic planning of all stripes and flavors (many will likely be experimented and tinkered with in the coming years) inevitably results in misallocation of resources, when compared to the market-based allocation, based on individual liberty and private property rights.

If the government was to do anything, far better to offer a tax deduction for those who contribute to the mortgage payment of those who cannot afford it.  Give a very generous tax incentive in 2008/2009 for voluntarily contributing to help someone else make their mortgage payments.  This could give many people several extra months to get things set before they would have to vacate.  This would be far better than giving a huge amount of arbitrarily-administered authority to the Secretary of the Treasury and his unelected bureaucratic underlings.  Though not perfect, this is far better than the unconstitutional bailout authorized by Congress last week, the many before, and the many which will occur.

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3 Comments

Filed under Austrian Economics, fiscal policy, Libertarian, politics, role of government

3 responses to “On Last Week’s Bailout (and Our Future Headache), Part II

  1. socialist brother-in-law

    I, too, am skeptical of the bill passed last week—and the current administration’s ability to execute it well—but I think you underestimate the pain and overestimate the swiftness of letting the market completely collapse and recover on its own. Just as one example, you claim that people who cannot afford increases to their adjustable-rate mortgages would more easily be able to buy a house after a round of deflation. While houses might be easier for some people to afford, those who lose their houses will still be burdened by either their previous debt or their bad credit histories, or both. They won’t be buying any houses again any time soon.

    At first glance, that may seem fair: they made poor choices and now they’re suffering the consequences. But what if you made good financial choices, had an affordable, fixed-rate mortgage, and basically were doing everything right, and then, because of a global financial meltdown, you lost your job and couldn’t find a comparable one for one or two years (within your definition of “short”). It’s unlikely you’d make it through that time without going broke yourself. You didn’t cause the problem—you were doing the right thing—but you still suffer the same consequences as those who created the mess.

    Intervention by the government and federal reserve, as problematic as it is, at least has some hope of blunting the effects of the crisis and preventing those who were not at fault from feeling serious direct consequences. I have little sympathy for people who got into mortgages they clearly couldn’t afford, or who invested in mortgage backed securities based on those products, and signs are that many of them will be severely affected by current events.

    In the end, though, I think we need to make sure that any recovery plan is paid for by those who profited from the previous bad policies. Where did all the money go? Well, as a (pretty good) first approximation, it went to people who are very well off. How can we recover some of that money? A more progressive tax system is one idea.

  2. plato04

    Interesting thoughts.

    The biggest issue is that government economic meddling and intervention caused this mess in the first place.

    Two wrongs a right doth not make. If the state is to blame, then why are we trusting them to fix this? Even if they are not to blame, why should they be trusted to fix this, considering the drastic consequences incurred in the Great Depression, or the 1970s stagflation, to cite two examples?

    We need a return to a system based on private property rights.

    Or, if those are fundamentally exploitative, then amend the Constitution to so state that we are, in fact, socialist, and explicitly state the bounds of government. If this is what we want, then we should say so.

    Even if this would work, from a position of pure economic equality, I still have no idea how one can increase the power of government (especially considering its already monstrous size) and safeguard liberty. Nor do I have any clue how such a scheme can be paid for without impoverishing the nation (including making the poor poorer).

    Far better to drastically shrink the size of government, rather than enslave individuals with burdensome laws and taxation, and destroy (or drastically limit) barriers to wealth creation.

  3. plato04

    Regarding my admittedly poorly explained housing example, there is the question of self-reliance. Should someone lose their house or job, whose responsibility is it to fix the situation? Is it the responsibility of the individual, or should this be a socialized responsibility?

    The idea of socialized responsibility I again have a hard time with, as it would usually mean that some individuals are compelled to give up something (or have something taken from them) against their will. Even if the reasons sound justified (i.e. to alleviate poverty or unemployment), the idea that we can take from someone (against their will) and give to someone else seems wrong to me. I admit there are exceptions to this rule in the Constitution. But I think they should be extremely limited, and form the true exception, rather than the rule. Safeguarding individual liberty should be foremost, and really the sole responsibility of government.

    I have absolutely no problem with voluntary donations. Individuals, in distress, can seek for help from their families, friends, and from those in the community, or other interested parties who are willing to voluntarily donate and help. But am I justified in coercing from others should I find myself in a pickle? Reasoning similar to this makes me very uncomfortable with socialism in general, and certainly the socialism we have in America today.

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