Thursday, November 20, 2008

The Real Cost of Bailouts

Now that the Republicans have started the gravy train chugging down the tracks, we can expect the Democrats to hop on board. It's important to remember the original problem. There is no shortage of cash. In fact, the better argument is that there is too much cash: credit is already too easy.Jonah Goldberg nails the the original problem, uncertainty:
One of the main reasons there’s all of this “money on the sidelines” out there among private investors is that Wall Street doesn’t know what the government will do next. Will it bail out the auto industry? The insurance companies? Which taxes will go up? How far will interest rates go down? How long will the federal government own stakes in the banks? Will more stimulus checks go out? If so, how big will the deficit get?

Uncertainty is what causes banks not to loan to each other. Uncertainty causes private investors to pull their money out of Wall Street. Uncertainty causes business owners not to take risks in new equipment or new workers.

Don Boudreaux, Chairman of the Department of Economics at George Mason University, explains the real cost of bailouts:
The number of different places from which these resources will be taken is large and spans a continent. So it's easy to overlook the fact that each of many productive firms from across the country will, as a result of this bailout, pay more for steel, machine tools, fuel, and other inputs they use in production. These other firms will contract their operations; they'll employ fewer workers; they'll produce less output.
On Cafe Hayek, Professor Bourdreaux points out the private investment during the Great Depression:

As government spending expands, private investment contracts. When government becomes active, the private sector stops. We'll hit bottom only when the government stops. That looks to be a long time from now.

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