Bailouts vs. Free Enterprise

If credit markets are so bad, why are we still being barraged with ads for mortgages under 6 percent? There are free market alternatives to all these bailouts, and we should look closely at these alternatives.

The bailout passed!

Too bad.

When so many politicians speak with one voice in support of the biggest act of government intervention in the economy in generations, I cringe.

Everybody talked about the “freeze” in the credit markets, but why, I wonder, were the cable news programs that repeated the credit-freeze mantra pausing for commercials from companies trying to lend me money? Ditech and LendingTree still hawk mortgages at under 6 percent. Some credit freeze.

Economist Robert Higgs of the Independent Institute looked at the credit numbers kept by the Federal Reserve. He writes: “Although certain financial institutions are undeniably in deep trouble — difficulties of their own making ... — credit markets in general have not ceased to operate. Moreover, lenders are extending credit in historically great amounts.”

Maybe this is why CNN business reporter Ali Velshi broke ranks when reporting on “dried up” credit and said, “When I say ‘dried up,’ I don’t mean there’s no money. But you’d better have good collateral and good credit.”

What’s wrong with that?

To those who say that without banks nobody can borrow, economist Steven Landsburg offers this response: “Banks don’t lend their own money; they lend other people’s (their depositors’ and their stockholders’). Just because the banks disappear doesn’t mean the lenders will. Borrowers will still want to borrow, and lenders will still want to lend. The only question is whether they’ll be able to find each other ...

“[A]s any user of can tell you, the technology for finding partners has improved since [the 1930s]. When a firm wants to raise capital, why can’t it just sell bonds over the web? Or issue new stock? Or approach one of the hedge funds that seem to be swimming in cash? Or borrow abroad?”

I suspect that the bailout will do more harm than good, like “aiding” an alcoholic by giving him booze. It perpetuates the moral hazard produced by government guarantees that created the problems in the first place. It acts as an enabler by giving more money to opportunistic lenders who assumed they’d be bailed out.

And of course the politicians made a bad bailout bill worse by adding in tax breaks for stock-car racers, movie producers, “alternative” energy, etc. Then they insisted that all health insurance must cover mental illness, a requirement that will launch an orgy of fraud and make health insurance unaffordable for millions. The conceit of the anointed knows no bounds.

After the bailout passed, the stock market turned lower. Was it because investors then thought harder about how the politicians will misspend our $700 billion? All government can do is move money from one part of the economy to another. What makes anyone assume the government knows best where the money should be?

Steven Horwitz, an economics professor at St. Lawrence University, got it right when he wrote, “There will be short-term pain if we don’t bail out these firms, but that is the hangover price we pay for 15 years or more of binge lending. The proposed bailout cannot prevent the pain of the hangover; it can only conceal it by shifting and dispersing it among the taxpayers and an economy weakened by the borrowing, taxing and/or inflation needed to pay for that $700 billion.

“Better we should take our short-term pain straight up and clean out the mistakes of our binge and then get back to the business of free markets without creating an unchecked executive branch monstrosity trying to ‘save’ those who profited most from the binge and harming innocent taxpayers in the process.”

Sure, without the bailout, there might have been a severe recession. Bubbles must pop. But it’s important that we let bubbles pop. Markets would then find a floor and recover.

Now the politicians are blowing some new air into the bubble, but we may have a recession anyway. And with more intervention, regulation and ambiguity about what the real market prices for those government-supported securities are, investors won’t know where the real bottom is.

So any recession will last longer. And the moral hazard the bailout perpetuates will lead to new bubbles ... and then demands for another bailout.

Free enterprise sounds nice. We should try it sometime.

John Stossel is co-anchor of ABC News’ “20/20” and the author of Give Me a Break: How I Exposed Hucksters, Cheats, and Scam Artists and Became the Scourge of the Liberal Media (January 2005) as well as Myth, Lies, and Downright Stupidity: Get Out the Shovel — Why Everything You Know Is Wrong (May 2007), which is now available in paperback.

13 comments from readers  

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Right on!! Did you ever consider running for president?

$700,000,000,000 divided by about 140,000,000 taxpayers comes out to about $5,000 per taxpayer. If the government had to intervene (and I agree with you that it was not necessary and will inevitably be harmful), they should have just given each taxpayer $5,000 to invest back into the economy. Whether they spent it, paid off debt or invested it, the economy would have been awash with cash and the credit problem solved.
"... why, I wonder, were the cable news programs that repeated the credit-freeze mantra pausing for commercials from companies trying to lend me money?"

Undoubtedly John Stossel is aware that such ads are frequently purchased weeks or months in advance, and are of course no guarantee that the product advertised is currently available. This is merely a matter of style, however, and not of fact, for Mr. Stossel's points are quite true.
Right on the "money", as usual from John. It's depressing, but someone has got to have the guts to "tell it like it is". Yes, the free market does sound nice, but what would these idiot politicians have to do if we did try it. They will never admit they are wrong.
Check out this prophetic story in the New York Times in 1999:
Mr. John Stossel, PLEASE don't stop!
Capitalism is all about businesspeople making profits at the risk of taking losses. Safety nets, government insurance, bailouts prevent companies from taking losses and they keep wasteful businesspeople in busniess. They need to fail, learn from their mistakes and try again, if they can find willing investors.

US economic history tells us that FDR deepened, widened and prolonged the 1929 Stock Market crash, turning it into the Grat Depression. How? By not letting the free market cleanse itself, by trying to "rescue Capitalism" with government intervention.

So, here we are again, with a Conservative in the White House, doing the same thing all over again. No wonder the stock market is not responding with eagerness, thinking health has been restored. I wonder how long the Depression will last this time and will the American people believe the lies that free enterprise brought this Depression and demand an even greater move toward economic dictatorship?
For all their bailout guff, the DOW now sits at just over 9k. They used to talk about 10k as this 'psychologically important' whatsis, I think a whole bunch of these investor-peeps could use some professional help, greed run amok is hardly sound economic policy, and part of the reason that a lot of people are going out of their homes and losing their shirts is because the whole thing got too exotic, too esoteric, and just plain too big.

Re: bailout-as-bandaid/tourniquet: If the Fed hadn't done something, chances are there'd be more banks on their way out of business, and police and FDIC doling out monies and barring the doors to some institutions permanently. Mortgage stupidity has had home loans being made to non-US citizens inside the United States while actual US citizens are packing up their stuff. I think the whole thing adds up to basically economic warfare, and I don't know who you blame there, you've got various entities and parties in different countries, suffice it to say that if the Fed had not taken action to stabilize it, then they could probably just go ahead and close down Wall St. altogether, which from one perspective might not be such a bad idea, too many people getting sucked in to get-rich-quick stuff and expecting something for nothing, at the end of the day. Maybe the DOW will stop falling when it gets to 5k or so, and maybe a lot of people will take a lot more conservative approach in the future. Mortgage-backed flashpaper was the underpinning, here, let's hope that in the future, investment strategies are more than card houses built on clouds etc.
Banks don't make money unless they lend money. There's tons of money out there to be lent. People with poor credit are going to have to pay up for loans, which is only fair. If the government hadn't attempted to equalize everyone by requiring lenders to make subprime loans, we wouldn't be in the current mess to begin with.
As a widow of 4 yrs who commutes 1.5 hrs each way to pay my bills, I applaud Stossel's article. I am 63 and can not plan a date for my retirement. We get nothing for free and I am disappointed that my government chose to artificially 'solve' the current financial crisis. I struggle to pay for what I need, or want, so I resent a bailout (handout?) for those who are reckless in their financial matters, whether they be individuals or corporations. How can champagne tastes on a beer budget be rewarded when I've been reasonably content to drink beer? AND, if I can't afford beer I make due with water!!!
John Stossel, the only voice of common sense on network television. It still wouldn't be right, but for $700 billion, the feds could give 200 million American taxpayers $3500 each. That would solve most of my financial problems. Consider it an advance payment on the Social Security that won't be there should I live long enough to be eligible to collect.

Why are there people without jobs, who can't afford a home or a decent car?

Let's eliminate the income tax, the real source of federal power and the cause of the current crisis.

It's two weeks to the election. Every congressman's seat is on the line (theoretically). Call him up and demand a pledge to abolish the income tax. If he or she does not give an immediate "Yes" answer, inform him that he has just lost your vote, then follow up on November 4th by voting for his opponent.

If your Congress rep is not willing to abolish the tax, he or she is a thief and not worthy of your vote. He is lacking in understanding of the underlying cause of the malaise. The next guy may not be any better, but he will at least understand why he got the job
Thank you for having the guts to say what many of us are thinking - too bad no politician would ever adopt your attitude!
WSJ wrote some great articles explaining what was happening and passing judgements. They agree with you and todays artcile on the opinion page is excellent

All you points are well taken and I agree with you
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What's amazing, and good, is that Stossel is still employed by ABC.
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