A Libertarian Argument For The Bailouts

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.

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8 Comments

  1. 1
    Captin Sarcastic says:

    According to what I have read, we have only spent about 12% of the bailout funds, and interestingly, while these bailouts were still being debated, I had wondered if just passing a bill that put the money on the table would stabilize the financial sector. It seemed to me that an emotional need had to be met, that being the need for confidence in the solvency of the system, and the trillion or so dollars passed to inject into the financial system met that need, but since it was only a psycological need, not really a tangible need, we may be able to pull the balance of those funds back at some point. But even in the meantime, they might show up in deficit numbers, but really aren’t debt or deficit until they spent. If we can get out of this with only spending 15% of the stimulus funds, I’d say that it was wildly successful.

  2. 2
    b-psycho says:

    “If a company is too big to fail, it is too big to exist” – Bernie Sanders
    The alleged point of the U.S. economy (I say “alleged” because I personally believe this was never the practice, instead being a national myth) is competition.  The whole “Sink or Swim!” ethos an’ all that.  Obviously bailouts fly in the face of that, and it’s especially insulting that it is failed corporations getting money the average person has been struggling just to even make, let alone keep.  Government policy up to this point has largely served to goose the financial sector at the expense of everyone else, and this is just one more example.
    I personally doubt that the choice was seriously as dire as “either give these failed millionares your money or we’re all DOOMED!”.  I’m not alone on that.  But considering the regulatory environment, if indeed that was  (or more accurately is, since they’re still siphoning away our money) the 100% uncontestable truth, then it has to be asked why we keep going a system that leads to some finance players being large enough that they’re exempt from Sink or Swim.
    Threatening systemic failure needs to be punished.  If the market can’t be allowed to do it, and as a result the government steps in, the task still must be done somehow.

  3. 3
    b-psycho says:

    BTW: here‘s an article from around the time of the bailouts arguing that Glass-Steagall never should’ve been repealed.  You’ll be surprised where that link goes…

  4. 4
    Fritz says:

    *I* wasn’t surprised where it went.  🙂  And, yeah, I agree with Bernie about “too big to fail is too big to exist”.  Creative destruction is a necessary part of a free market.

  5. 5
    Eclectic Radical says:

    “And, yeah, I agree with Bernie about “too big to fail is too big to exist”.”
     
    I actually agree with Bernie on this too, the problem is that companies need to be stopped from getting ‘too big to fail’ before they fail. Once they get there and start to fail, then ‘too big to exist’ becomes a much weaker argument. There are a great many things that could have been done to stop Detroit from becoming a three company town,  from the  proper enforcement of antitrust legislation to prevent improper mergers and buyouts to the federal court system not bending over to drive potential competitors out of business for the the Big Three.
     
    The problem is, none of that happened. In the absence of meaningful steps to prevent the consolidation in the first place, the only solution is to cushion the effect of auto industry bankruptcy on the rest of the country.
     
    Though, honestly, rather than phase out production lines, I would have sold GM off in pieces as multiple companies.
     

  6. 6
    Fritz says:

    I can well believe that without bailouts, the depth of the economic trough might have been much deeper and very painful as the market deleveraged itself with brutal efficiency.
     
    However, with the bailouts, it seems likely (to me,  at least) that we have set ourselves up for years or perhaps decades of an essentially flat economy — the Japanese “lost decade” writ very large.  Every attempt at stimulus spending is negated by the instant market knowledge of what it will take to service (why even bother talking about “pay off”)  the resulting debt.
     
    So how many years of a stagnant economy is worth one year of intense suckitude?  A nasty calculus, that is.

  7. 7
    Fritz says:

    I meant “is worth avoiding one year” in the last paragraph.

  8. 8
    Eclectic Radical says:

    “Every attempt at stimulus spending is negated by the instant market knowledge of what it will take to service (why even bother talking about “pay off”)  the resulting debt.”
     
    The actual relationship between the national debt and the economy is pretty hazy. The actual national debt is always growing, national debts always do. The mechanism for paying interest on the debt and paying the debt down is relatively stable (though it should be reenforced with a proper sinking fund) and under normal circumstances the size of the debt itself is not an issue… massive deficits are an issue when they are run up during periods of prosperity that should be devoted to paying one’s bills. One of the biggest problems in this instance is just how much American debt has been sold to specific countries like Saudi Arabia and China, and such problems actually color foreign policy far more than domestic and economic policy.
     
    ‘Market knowledge’ is a nice, convenient, logical sounding label for saying ‘people are stupid and paranoid.’ The whole reason bubbles collapse in the first place is that people who overpaid for artificial value panic and sell out because everyone else is selling. And they keep selling at a loss, just because everyone else is selling, because they are afraid to lose ‘everything.’ Except that value always has to come up again as the market normalizes after a correction, so selling at such a loss and laying off employees, etc, merely prolongs the panic and creates a real recession.
     
    The big problem we face in economic policy is not Washington. It’s in New York, and it’s the fact that the people whose business it is to manage our capital markets have no understanding of economics… just what another famous New Yorker (Meyer Lansky) would have called ‘numbers and policy.’ They buy because everyone is buying, when they should be selling or standing pat, and they sell when everyone is selling when they should be buying.
     
    The words ‘market knowledge’ are a joke. The problem is a total lack of knowledge of markets in the people responsible for managing our most critical capital and debt markets.
     

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