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Jens 'n' Frens
Idle thoughts of a relatively libertarian Republican in Cambridge, MA, and whomever he invites. Mostly political.
"A strong conviction that something must be done is the parent of many bad measures."
-- Daniel Webster
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Wednesday, October 01, 2008 :::
Political Hazard
I'd like to make some further points about this bank bailout. Many have written about the "moral hazard" of government bailouts. The moral hazard is this: if private actors believe that the downsides of risky business decisions will be covered by government, they will be more likely to make risky decisions, insulated as they are from the consequences.
There's another hazard here, though. It's a political hazard. The bailout creates a political constituency for government regulation. The government is bailing out bad mortgages and the taxpayer is ultimately on the hook. If the taxpayer is ultimately responsible for bad mortgage loans, why should the taxpayer not have a say in who gets a mortgage? A friend suggested, quite seriously, a federal law requiring a 20% downpayment for all new mortgages and a federal agency to determine, on an individual basis, whether home-buyers should qualify for a mortgage.
This reaction seems allied to support in nations with socialized medicine for denying medical treatment to smokers, the obese, alcoholics, etc. -- since the taxpayer has to pay the bill at the end, why not save money by regulating away expenses? Tough to argue.
Destroy Capitalism to Save It
At The Atlantic Monthly, Megan McArdle raises the fear that if a lack of government intervention precedes a catastrophe, a widespread public belief that the lack of government regulation caused the catastrophe will spread, whether true or not. The consequence will be even greater regulation. People who believe that government intervention will likely be worse for the economy than non-intervention are therefore being asked to play along, lest a failure to play along lead to erroneous economic conclusions on the part of the public.
This is self-defeating. From the point of view of the free-marketer, he is being asked to desert his beliefs support something that he believes will harm the economy so that people will not think him or his principles at fault if economic harm occurs. Even if there is a government intervention, a financial collapse is likely to be blamed on laissez faire strictly because of widespread ignorance and economic illiteracy. Let us remember that Herbert Hoover responded to the '29 crash by supporting higher taxes and tariffs; in the popular conception of history, he did nothing and his free market principles were responsible for the Great Depression. Free marketers would be better off devoting their efforts to public education.
The Rise of the Rent-Seeking Investor
Apparently, recent public opinion polls have shown a shift toward approval of the bailout, following the dramatic stock market losses. (I say dramatic, not large, and I choose the word carefully.) Advocates of free markets have long held that building an "ownership society" and increasing the number of people who own stocks (including through 401ks and similar accounts) would create a constituency for free markets. That is, while relatively poor non-investors might vote to tax, e.g., investments and dividends (soak the rich), a large investor class comprising a majority of the citizenry would support laissez faire policies most conducive to economic growth. I fear that the opposite is happening: a large number of the new investors are looking to the government to regulate markets in such a way as to shield them from market downturns. If the bailout is a transfer of wealth from taxpayers to investors, it is a sign of the rise of a new, larger investor class -- quite willing to use government regulation as a tool to enrich itself. If this is so, there will surely be other interesting consequences to follow.Labels: finance, media distortion, philosophical issues in democracy
::: posted by Anonymous at 8:35 PM
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