PLEASE, Just Say No!

The House will be voting today on the Bush Bailout. I do not presume that any members of Congress (either House or Senate) will read The Austrian Economists blog spot. But I just want to put this out there. Vote NO to the bailout. Stop the madness, and instead support real change in the governmental framework that has mucked up the financial system so that we eliminate (rather than intensify) the perverse incentives (e.g., moral hazard) and distorted information (e.g., risk analysis, and accounting practices) that GOVERNMENT INVOLVEMENT in the financial market has produced.

Let us be very clear --- our current problems are a function of government policies and mixed ownership forms. Government Sponsored Enterprises (GSE) are NOT market enterprises; Government jawboning and threats by powerful individuals (such as Senate Finance Committee Chair Barney Frank) for banks to lower mortgage requirements so that less qualified buyers could receive a loan did move the mortgage industry away from pricing practices and risk assessment analysis that traditionally produced more prudent decision making; and the orgy of discretionary spending that has characterized the Bush Administration is NOT fiscal conservativism and free market ideology. Last night I heard perhaps one of the most disgusting political interviews since Nixon's claim that he was imposing wage and price controls to preserve the free enterprise system from Rahm Emanuel, and unfortunately you really cannot distinguish between Emanuel's nonsense and what comes out of President Bush's mouth. But we shouldn't be that surprised --- remember one of Bush's first economic policy acts was to promote protections for the steel industry.

The divorce between rhetoric and reality among politicians with regard to the free enterprise system has been problematic since Reagan. At least prior to Reagan most politicians didn't claim they were unashamed defenders of the free enterprise system. Though I guess we should always remember that John Maynard Keynes is often portrayed as the "savior of the capitalist system", when in fact his ideas were a major justification for the expansion of the government's role in the economy.

But this is all history --- of ideas and of policy. The consequences are what we are living through --- bloated government programs and bureaucracy that mucks up the workings of the market economy. The only thing that has kept us afloat so far is that government is inept and entrepreneurs have been nimble enough so that the gains from trade and the gains from innovation have been able to out pace the losses due to government stupidity. But IF we shut down our borders and if we raise the costs for domestic trade; and IF we make it very costly for innovators to think up new ideas and find the financing to bring those ideas to life in the market place, THEN a real crisis will result. If instead, we were to use the current financial mess to learn the right lesson and get government out of the business of doing business, and instead restrict government to the minimalist role of the "nightwatchman state" we will see market adjustment proceed ruthlessly and quickly cleaning out the malinvestments and redirecting resources to more efficient uses and people to more effective employments of their time and talents. Get government out of the financial industry, let businesses fail, let reallocation of resources and people take place, and lets build effective restraints on government so that we don't end up in this mess again.

Instead if we provide this bailout, as it almost inevitably appears we will, we will move even further away from economic decisions based on "market" pricing and the disciplining of those decisions based on "profit and loss" statements. We will get an even bigger orgy of spending backed by easy credit and imprudent and irresponsibility rather than wealth creation will characterize the US economy.

Government can throw money at this problem, but government planning cannot FIX this problem. Intentions do not equal results in economic policy, but that is what the administration is going with here. As my good friend Steve Horwitz so eloquently has put it "Ought presupposes can" in some many public policy discussions. But it doesn't. You have to demonstrate the "can" even if one for the sake of argument grants the "ought".

In this instance, government officials have not justified either the "ought" or the "can". So many appeal to members of the House --- VOTE NO --- and save us from this madness. Will this result in a deeper recession right now --- YES, but is that the right thing for government to do --- YES. To try to throw money at a problem that was caused by a system of incentives that said we will bail you out when your risky investments go sour is merely to reinforce the perverse incentives that caused the problem in the first place --- JUST SAY NO.

Horwitz's demand that those who believe they "ought" to do something also take the time to demonstrate that they "can" do what they propose, he is capturing the wisdom of economic teachings from Adam Smith onward. Utopia is not an option, and economics does put parameters on those utopias. Yes Virginia, there is a science of economics! Independent of a value judgements, we economists must insist that public policies must be examined in light of incentives and information. Once we do that, then the question of "ought" becomes less idealistic and more serious. But ideology (in this case anti-market) and interest groups (in this case the monied interests of Wall Street) work together to dismiss the teachings of economic science. This was true in Adam Smith's time and it is true in Steve Horwitz's time. Visions of the "ought" do not, and cannot be allowed to, assume "can", but they do and we economists must continually expose these efforts.

In my opinion, we ought NOT do the bail out, but even if for sake of argument I granted that we should, I would argue that there are insurmountable difficulties in the policy action proposed so that we cannot achieve what is intended with this bail out in terms of serving the public interest (it will definitely succeed in serving private interests).

Perhaps the best words ever written on this were in fact penned by Adam Smith himself, so I will leave you with those:

What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. (The Wealth of Nations, Vol. 1, p. 456)

VOTE NO.

Comments

[Tyler Watts]

Pete,

I salute you for taking a stand and providing some Austrian leadership. This post is what all "policy briefs" ought to be.

[Sheldon Richman]

Bravo!

[Maxx Mantooth]

Forwarding this post to everyone I know! This stuff is too important to be taken lightly.

[Charles N. Steele]

Great post, Pete!

People are mad as hell about the bailout. We Austrians need to do all we can to make it *informed* anger, so that it gets put to good. use.

[Daniel]

Peter,

Here's what President Bush had to say to you--

"I don't care what somebody on some college campus says."

Source: Washington Post

[Gavin Kennedy]

I have reservations about your arguments - your economic principles may be plausible but the political economy is suspect.

You appear to have missed Adam Smith's approach to such problems, bearing in mind the did not have comparable experience of an economy-wide, and certainly not a global-wide, crisis.

My longer comments are posted on www.adamsmithslostlegacy.com