Dan Mitchell on the Bailout

Bailout Would Impose Needless Economic Damage

The proposed bailout of the financial system is a misguided scheme that will hurt the U.S. economy in the short run and long run. The economy currently is stumbling as a consequence of a government-created housing bubble, but a bailout of companies, executives, and shareholders that made unwise decisions would, at best, extend the economy's adjustment process. More likely, the bailout would impose considerable additional economic damage because political factors would at least partially supplant market forces in determining the allocation of resources...

Providing government with enormous - and opaque - new powers is likely to exacerbate economic uncertainty and increase system-wide risk...

Why the Bailout is Bad for America
*The bailout is bad for the economy. The unfortunate truth is that bad government policy has resulted in excess investment in the housing sector, and the inevitable reallocation of labor and capital is going to cause some economic dislocation. The good news, though, is that this process - if not hindered - will create a stronger and more vibrant economy.

*The bailout repeats the mistakes Japan made in the 1990s.

*The bailout will increase corruption in Washington.

*The bailout rewards executives and companies that made poor choices.

*The bailout will encourage imprudent risk in the future.

Government Caused the Turmoil in Financial Markets
One of the ironies of the bailout debate is that supporters think that more government intervention is the solution to problems caused by bad government policy. The main mistake was probably the Federal Reserve's easy-money policy. By creating too much liquidity and by driving interest rates to artificially low levels, the Fed set in motion the conditions for a housing bubble...

Moreover, short-term stock market performance is a bad indicator of good government policy...

One of the reasons why short-term stock market performance can be misleading is that investors sometimes care more about what other investors think than they do about the underlying fundamentals...

When government tries to redistribute wealth from rich people to poor people, it causes economic damage by discouraging productive activity by the most successful and by discouraging productive activity from those who are lured into government dependency. The proposed bailout is even more pernicious. It would redistribute wealth from poor people to rich people, and simultaneously encourage reckless behavior by recipients and impose an immoral burden on those that behaved responsibly.

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