Some politicians and government officials are making reckless charges of greater financial turmoil in the absence of a bailout. These grossly irresponsible statements may cause short-term market losses as investors try to second-guess how other investors will respond, but the assertion that the stock market’s health – especially in the long run – depends on bigger government is belied by real-world evidence. Japanese politicians made many of the same mistakes in the 1990s that American politicians today are considering, and the Nikkei suffered a lengthy period of decline – and remains today far below its peak level.
Proponents of a bailout also are trying to rattle credit markets by arguing that inaction will cripple commercial and household lending. Fortunately, there is little evidence of a freeze in credit markets, though the Administration’s rash rhetoric and the specter of a bailout doubtlessly are causing needless uncertainty and temporarily higher interest rates. Once the issue is resolved, one way or the other, credit markets will resume normal operations. The only question is whether capital allocation will be distorted – and long-run growth hindered – by government intervention. ~Daniel Mitchell
The role the government and bailout supporters have played in exacerbating the real problems in credit markets and sapping market confidence with apocalyptic warnings will, I suspect, go down as one of the most dangerous episodes of hysterical overreaction in recent history. Parallels with Iraq are obviously not exact and can be overdone, but we are once again being treated to the spectacle of manifestly reckless and irresponsible people damning everyone who opposes them as irresponsible in an attempt to ram through bad policy.
Update: Jeffrey Miron makes all the right points:
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.
The costs of the bailout, moreover, are almost certainly being understated. The administration’s claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.
If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.