Benign neglect the least worst approach to the financial crisis - Roberts in WSJ

Russell Roberts an economics professor at George Mason University had a dismal but persuasive piece in the Wall Street Journal recently concluding that so much of what the federal government is likely to do will make the financial crisis worse, we'd be better off with inaction. Some excerpts:

"President George W. Bush plays the role of Hoover, the so-called free market ideologue who is trying anything to avert disaster. He signs a $700 billion bill putting Treasury in charge of buying troubled assets. A week later, the money is used to partially nationalize the banks. Some companies, like Bear Stearns, are bailed out. Others, like Lehman Brothers, are not. Some companies are sold. Some are allowed to fail. There is no plan, no rules, nothing to count on.

"It's just like the New Deal: a massive accumulation of power in Washington justified by the need to do something. There is every reason to think this trend will accelerate regardless of whether Barack Obama or John McCain wins the election.

"...Just as in the 1930s, there is no evidence that the policy makers have any understanding of what they are doing. They need to make way for the natural forces of repair. They need to let housing prices fall. They need to let firms go bankrupt. They need to let firms that are healthy thrive. They need to let healthy firms buy the sick firms. It is time to let the imprudent fail and the prudent pick up the bargains.

"A recession is coming (or has already arrived) no matter what happens in Washington. The question is whether the attempt to forestall it is going to make it worse and turn it into another Great Depression.

"By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s.

"The next administration is unlikely to do any better. ..Is there any evidence from the last seven months that (Paulson and Bernanke)  understand the underlying cause of the illness, or how to cure it?

"Worst of all are the political incentives that are unleashed when Washington promises to spend a trillion dollars (and counting). No one can spend such money wisely even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. Inevitably, such decisions will begin to be more about politics than economics.

"The banks were first. Then the insurance companies. The car makers are getting a cut. Who's next? The governors, probably. Homeowners are waiting. Then there will be the hedge funds. Once the line forms, companies will stop trying to save themselves and focus on being saved by Washington...

"Unfortunately, there is no consensus about a preferable alternative...  At such a time, inaction may be the wisest course of action." (END EXCERPTS)

OUR COMMENT: Here's for more partisanship and gridlock in Washington DC. Down with consensus-seeking and bipartisanship! It threatens action when what the nation needs most out of the national capital is inaction.

More Roberts at

http://www.invisibleheart.com/

http://www.cafehayek.com/

http://econlog.econlib.org/

TOLLROADSnews 2008-11-02