In essence we already agreed to the bail out some time ago. Have you ever spent $17,000 on a car and asked the dealer what the warranty for the car "really meant"? Well, the Chinese spent $340 billion on agency debt and probably asked the same question at least once or twice. They live in a world of secret agreements with leaders, not transparent democratic arrangements. So when it comes to the U.S government decision, we're not just starting from scratch here. How many phone calls do you think Hank Paulson has received from the Chinese central bank since August 2007?"Are you *sure* that paper is safe enough for us to keep on buying?"
We'll never know exactly what kind of verbal dance Paulson concocted in response, but just look at the resulting flow of purchases and the relatively slight mark-up over Treasuries over that period of time. The Chinese (among others) thought we were standing behind the securities, at least in any world-state short of federal government quasi-bankruptcy. (In fact Paulson is in a total bind once that phone call comes in. He doesn't have much incentive to just say "tough luck" and precipitate a crisis when otherwise no crisis is on the horizon.)
So should we try this: "Oh, is that what you thought? Guaranteed? Did we use that word? Sorry, try reading our signals better next time. We love you. Great job with those Olympics. And when it comes to those Treasury Bills, we really do still mean it."
The libertarian critique of the mortgage agencies is, in my view, very much on the mark. But still the error has been made and we must pay up. As Steve Chapman points out, the bailout is a necessary evil, but with emphasis on the word "evil."
Hard libertarians often give short shrift to both the moral and practical consequences of just letting things fall apart with a bang. Yes, we all concede that Social Security and Medicare are bad programs that should, at the very least, be structured very differently than they are. But that doesn't mean we can just try shock therapy. For one thing, a lot of old people would starve because they believed their government--a valuable object lesson in the problem with relying on government programs, to be sure, but it is perhaps a mite rough to let millions of old people die pour encourager les autres. For another, there is no political possibility of enacting a law that causes millions of old people to starve.
Likewise, it might be fun to let the financial markets collapse catastrophically in order to teach people that they oughtn't to speculate, either on securities or government bailouts. On the other hand, the Great Depression sort of sucked, and not just for people who took a flyer on AT&T at 87.
Going forward, of course, we should take pains to make sure this sort of thing doesn't happen again, first among them ensuring that the shareholders and managers suffer for the mistakes made by their firms---and of course, by refusing to make those sorts of implied guarantees for ostensibly private companies. Perhaps we should even pass a law forbidding the government to bail out insolvent banks. But we already lost this round.
Exaggerate much?
Would millions of people starve if social security were cancelled?
I call B.S.
No one in the United States has to starve. There are plenty of options to not starving, having sat in on several church meetings where we specifically discussed families in our community (church goers and non alike) who needed food/help/finances (and subsequently got it) I can call this B.S.
There are other organizations like the one I was in. Secular and religious alike. And there are also food programs.
No old person will start if we cancelled SS.
All that will happen is they will all whine. Some will no longer have the option to eat their preferred foods. Others will go back to work for a few more years. Others will eat the basic staple foods that are provided by various charitable and governmental orgs.
Posted by sam | September 10, 2008 5:03 PM