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Oct 1st 2008

I’m with Jeffrey Miron on the $700,000,000,000.00 Bailout

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.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

[source: CNN]

See also:
I’m with Newt Gingrich on the $700,000,000,000.00 Bailout.
I’m with Ralph Nader on the $700,000,000,000.00 Bailout.

2 Responses to “I’m with Jeffrey Miron on the $700,000,000,000.00 Bailout”

  1. […] also: I’m with Jeffrey Miron on the $700,000,000,000.00 Bailout. I’m with Ralph Nader on the $700,000,000,000.00 […]

  2. Tiff

    Have you hear this weeks “This American Life” (I’m a fan of their podcast). Anyway, it has some interesting stuff explaining the current crisis, and the bailout. If you get the chance, listen to it. Very informative.