No Bailout

Arnold Kling has written an excellent short article against the bailout. He would prefer to address the current crisis by reducing bank capital requirements.

I am resolutely opposed to the proposed bailout. I do not want to invest in those rotten mortgage-backed securities, and I'm incensed that my government is going to force me to do it.

I remain deeply skeptical that any bailout of any kind is even useful, much less necessary. If anything is to be done at all, I would much prefer Kling's proposal to anything being considered by Congress.

My preferred outcome is for the government to do nothing at all. If these banks and investment companies are on the verge of collapse, we should let them die.

Everyone is worried — although few are willing to state it in such terms — that if we do nothing, the economy may collapse into a depression. I do think it's important to acknowledge that this is possible. The credit crunch we're in right now really is of historic proportions; a major change in the economy is inevitable. However — and this is where I break with common thought — I believe government intervention will slow the process of recovery.

Bankruptcies and liquidations would do us good. The bailout plan's raison d'être is to prevent bankruptcies and liquidations, deliberately prolonging the malinvestments currently in the system.

The Great Depression was not caused by the credit crunch. The Great Depression was caused by government policies (wage and price controls, National Industrial Recovery Act, public works programs) aimed at preventing price adjustments and the liquidation of failed businesses. At the present time the calls for intervention haven't spread beyond the financial sector… but if they do, we could indeed be witnessing the beginning of a Second Great Depression.

If we'd let the financial meltdown play out by itself, we could see a sharp but short recession. Think 1921, not the 1930s.