Let the Free Market Fix The Economy!

Cross-posted from Crystal Clear Conservative on September 30, 2008:

Truthfully, I am sick and tired of hearing about the $700 billion dollar bailout that members of the House of Representatives voted against yesterday.  The bailout was flawed in so many ways, and it would have taken tons of money out of taxpayers’ pockets.   So, you may ask what would be the solution.

Let the free markets fix the economy.  After all, we live in a country, where our economy is based on the free market system.   Eventually, the economy will even out, because it is typical for the economy to be up and down.

However, there is another perspective to economic outlook.  Dr. Jeffrey A. Miron, who is a senior lecturer in Economics at Harvard University wrote a commentary, which is featured on CNN stating that bankruptcy might be the right answer.  For some reason, I am agreeing with his views.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

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.

This makes a lot of sense, and I agree with Dr. Miron on his points.  However, I still stand firm in my suggestion of just let the economy fix itself.


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