Harvard Economist Jeffrey A. Miron: Bankruptcy, not bailout, is the right answer:
The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.
Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.
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. ... In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending.
Also, Chris Langreiter links to an article by economist Steven Horwitz: An Open Letter to my Friends on the Left (to read), as well as an economics blog focusing on the crisis, The Big Picture.
Tuesday, September 30, 2008
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