A Reasoned Approach to Abandoning the Bailout

As written by a "Libertarian economist":

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.

In other words, rewarding those who made poor decisions with the ability to make more poor decisions. This is what got us into this mess; banks--with pressure from the government--gave mortgages to those who had no business getting them. Someone making minimum wage has no business buying a $300,000 house yet the Democrats, through Fannie and Freddie, changed the idea of owning a house from a privilege that is earned through hard work and education to a right. Owning a house is not a right.

I'm steadfastly against the bailout at this point after being on the bubble until yesterday. It goes against Conservative principles completely to essentially nationalize private businesses. If Republicans vote to allow a bailout, we will have lost any high ground we may have had on fixing social security, extending the Bush tax cuts and fighting against socialized medicine. You can not be for socialistic policies on one hand and against them on the other. Selective capitalism is a recipe for disaster.

Update: More along these lines in this essay by John Montgomery in The Australian.