The Bailout

Every smart blogger I read, and a lot of economists, are convinced that passing the Paulson/Bernanke bailout, as proposed, would be a big mistake. That’s what I thought.

I tend to favor proposals like Arnold Kling’s to address it by easing some regulatory constraints on banks (and, yes, the federal government would still back up deposits at greater risk than before), rather than having the government buy bad loans and cause an open-ended string of unintended terrible consequences.

Is there much chance that what comes out of Congress will be sensible?

I wonder if McCain and Obama are reconsidering how much they actually want to be the next president…

Out of the Frying Pan

In case anybody is wondering, I’m against the proposed government actions to address the current financial sector problems.

Like most people I don’t really understand exactly what has happened, which people and factors are to blame, and what will happen if no actions are taken.

But, I’m highly skeptical that the best action is one that’s so expensive, and so much of an expansion of federal involvement in the markets.

I’m sure that at least part of the problem stems from existing regulatory factors that have encouraged poor lending practices, complex and exotic financial instruments, and the lack of concern about assuming excessive risk because the federal government could be expected to absorb the losses to avoid a crisis.

I don’t oppose all regulation. I’m sure that many things can and should be done to increase transparency and make the value of assets easier to determine. And, if the problem is really severe, there’s probably a much more modest action that could go most of the way towards instilling confidence in the system without committing us to so much additional debt, socialization of risk, and direct involvement in the markets.

I hope that cooler heads prevail, and we don’t rush into really bad actions out of fear.