September 30, 2008

Armageddon Shmarmageddon

Drudge has some fine links today:

Kiddies on drugs personify the Obama message

Congress is trying to enact The Communist Manifesto

and most essential 
The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

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.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

Put Armageddon on hold

My policy is Victory! I'm long and strong mining and building materials from this morning (or possibly long and wrong, if an even fouler crap sandwich gets enacted in which case I'll bail). Best is complete failure of the Bill To Socialize American Housing and Finance, then getting out of the way so that private American ingenuity and guts can let rip, helped by radical tax cuts and radical spending cuts. Let the government promote a national security driven program, a Homeland Surge, to drill for oil, build clean coal and nuclear power stations and renew infrastructure - pronto, pronto - all with private money like an Anti-Keynes. (I said I was long building materials). That would galvanize the markets and galvanize America with a sense of national purpose for your benefit and our children's instead of a nation which buys pills now to be paid for by our children. The moral disgrace of modern public finance saps morale and purpose.

John McCain, can you hear me? You can lead by adopting a coherent, simple message, my message, the House Republican message, your party's message. Oh and no more compassionate conservatism, it's too cruel.

¡Ay, caramba! or, possibly, Banzai!

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Bonnabel Wood