Dark Star

Safe in my think-tank, as the Wall Street Journal puts it (although my personal banker would laugh at the idea), I am bemused by the number of people who are saying that we have to "do something" about the financial mess. As Andy's correspondent below points out, "do something" is rarely a recipe for success.

Let's look at the main issue for many here: the credit squeeze. As Jeff Miron says today, that is overblown and is in part *caused* by all the bailout talk:

Thoughtful advocates of the bailout ... argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

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.

Of course, these are reasonably sensible people responding to stimuli and signals from government. And of course, that's what got us into this mess in the first place.

Now as it happens there are lots of things we can do which do actually rise to the level of "doing something," but which don't involve giving bureaucrats the keys to the kingdom (incidentally, this is statism, not socialism — socialism at least purportedly wants to redistribute wealth for the benefit of the working man, which the Paulson plan does not aim to do, even if some House members on the left would like a bailout to do so).

The administration can reform mark-to-market accounting, we can break up and privatize the GSEs, we can reform certain insurance practices such as requiring lenders, not borrowers, to pay for PMI. We can abolish the bank/thrift divide and reform the CRA. There may be a case for some sort of structural stability office in the Treasury as a least-worst option, but we're still thinking that through. Oh, and the President can fire Henry Paulson, whose over-the-top reaction turned a big but manageable problem into an international crisis...