As with all political labels, libertarianism includes a wide variety of views. While many libertarians automatically believe any government action is bad (and often cherry pick the facts to defend their view), some are more open to reality and do see exceptions where government action is necessary. Megan McArdle provides an example. She gives a number of arguments against the bailouts but concludes, “That said, they were probably the best thing we could have done. If you disagree, you need to sketch out a plausible alternative scenario.” She turns to Tyler Cowen to consider the alternative:
Without the bailouts we would have had many more failed banks, very strong deflationary pressures, a stronger seize-up in credit markets than what we had, and a climate of sheer political and economic panic, leading to greater pressures for bad state interventions than what we now see. Milton Friedman understood all this quite well, which is why argued bailouts would have been a good idea in the 1929-1931 period.
(By the way, some libertarians like to pretend that Milton Friedman blames the Fed for “contracting” the money supply by one-third in that period but in reality Friedman blames the Fed for having let the money supply fall by one-third and not having run a bank bailout.)
If you are a libertarian, is not our current course more favorable for liberty than would have been a repeat of 1929-1931? If not, I would be curious to hear your counterfactual version of how matters would have proceeded, without the financial bailouts. Is it that you think the regional banks would have raised the financing to pick up the entire bag and keep the banking system afloat? Or is it that natural market forces would have somehow avoided a wrenching surprise deflation? Or do you think the authorities for some reason would have not nationalized the major banks? Please let us know.
Maybe you think that the bailouts will have disastrous long-run consequences. And maybe they will, I worry about this too. But if anyone should know that modern politics can only stand so much short-run panic, it is libertarians and fans of Bryan Caplan’s book. If we had not done the bailouts we did, we would, within a few months’ or weeks’ time have received a much worse and costlier bailout run by Congress and Nancy Pelosi. How does that sound?
I’ve often noted the influence of Chicago school economics on Obama in response to conservative claims that he is a socialist. Conservatives and libertarians have often claimed that his actions upon taking office demonstrate support for socialism, ignoring his need to respond to a crisis. From Cowen’s post we see that even Milton Friedman fell in the camp of believing that strict libertarian opposition to all government action is not always the best policy and that action of this nature was needed in a crisis.
