September 29, 2008

Delaying Recovery - AKA Bailouts

It's not surprising that the hysterics about evil Republicans spending our tax dollars! to bail out the rich and line their friends' pockets has subsided. The bailout bill was voted on, and generally, of course, it was Democrats voting for and Republicans against. As one would normally expect of such a thing. The tenor on the left has become a bit more subdued, if not a little angsty about why such a plan would fail, when obviously something has to be done. Actually, it's true - something must be done. But what?
It is true that the financial system must be rescued; it must be rescued from the institutions holding bad debt that are currently draining capital while waiting for a bailout and adding little in return. It is they that are preventing wealth-generating activities in the financial sector and the other parts of the economy from expanding real wealth.
The problem is a grave lack of understanding of economic adjustment. The great boogeyman, recession, is seen as Armageddon instead of the necessary period that occurs between times of over-regulation and a return to a free market. The cures for the alleged problem are worse than the disease; and guarantee far worse diseases in future.
Conventional thinking presents economic adjustment — also labeled as "economic recession" — as something terrible, even the end of the world. In fact, economic adjustment is not menacing or terrible; from an economic point of view, it is nothing more than a time when scarce resources are reallocated in accordance with consumers' priorities. Allowing the market to do the allocation always leads to better results. Even the founder of the Soviet Union, Vladimir Lenin, understood this when he introduced the market mechanism for a brief period in March 1921 to restore the supply of goods and prevent economic catastrophe. Yet for some strange reason, most experts these days cling to the view that the market cannot be trusted in difficult times like these. If central bankers and government bureaucrats can fix things in difficult times, why not in good times too? Why not have a fully controlled economy and all the problems will be fixed forever? The collapse of the Soviet Union's centralized system is the best testimony one can have that controls don't work. A better way to fix economic problems is to allow entrepreneurs the freedom to allocate resources in accordance with society's priorities.
Sigh. But really, go read the whole thing; it's too important to miss. We're forestalling recovery and ensuring a much more difficult (if at all possible) recovery in the future - or we can run head-on into full socialism and wait for the inevitable collapse from which there is no recovery - such as mandating socialism by voting for a bailout bill that literally gives the Treasury Secretary carte blanche to do whatever he wants, whenever he wants, to ENSURE the economic welfare of the US Citizens. Not sure where there is any liberty in there, but right off the bat it's antithetical to the constitution. Go figure.
Only a few weeks ago, we saw that the liquidation of a large bank such as Lehman Brothers and the sale of Merrill Lynch did not cause massive disruptions. In fact, the adjustment was swift and almost invisible. The reason for the smooth adjustment is that the market was allowed to do its job. If government and Fed bureaucrats had tried to intervene with bailouts, the whole process would have taken much longer and would have been very costly in terms of real resources.
Tell that to the barbarians at the gates, or the ideologues holding torches. I'm sure they'll listen.


Anonymous said...

I don't know how I found my way over here, but I've been reading insanity for the last little while and it was beginning to sap my will to live. Looks like I might be back on my way to reading actual sanity. Thank goodness someone has a brain left in these days.


AnnieMcPhee said...

Blog it, siobhan. We need all the sane voices we can muster.