The Case for Doing Nothing | Jeffrey A. Miron | Cato Institute: Commentary

The Case for Doing Nothing | Jeffrey A. Miron | Cato Institute: Commentary: "When people try to pin the blame for the financial crisis on the introduction of derivatives, or the increase in securitization, or the failure of ratings agencies, it's important to remember that the magnitude of both boom and bust was increased exponentially because of the notion in the back of everyone's mind that if things went badly, the government would bail us out. And in fact, that is what the federal government has done. But before critiquing this series of interventions, perhaps we should ask what the alternative was."

"From the distributional perspective, the choice is a no-brainer. Bailouts took money from the taxpayers and gave it to banks that willingly, knowingly, and repeatedly took huge amounts of risk, hoping they'd get bailed out by everyone else. It clearly was an unfair transfer of funds. Under bankruptcy, on the other hand, the people who take most or even all of the loss are the equity holders and creditors of these institutions. This is appropriate, because these are the stakeholders who win on the upside when there's money to be made. Distributionally, we clearly did the wrong thing."

"The problem isn't only that the bailout wasn't necessary in the first place. The bailout may have made the credit situation worse. When banks hear that the Treasury Department is dangling hundreds of billions of dollars out there to purchase their toxic assets, what are they going to do? Sell their assets for 20 cents on the dollar, or hold onto them in the hope that the government will eventually buy them for 80 cents on the dollar?

The moment Treasury Secretary Henry Paulson got in front of the cameras last fall and announced that we were on the brink of catastrophe, Wall Street was bound to freeze, because bankers wanted to figure out how much money was available and how they could get some. Let's not realize any losses we don't have to realize, they figured, because Treasury's going to bail us out."