Were the bailouts a good idea?
Following the renomination of Bernanke, it is worth revisiting this question. Here is a recent report:
With the FTSE World Banks index up 130 per cent since its lows of
early March, the paper losses that governments in France, Belgium,
Luxembourg and Germany are sitting on have also shrunk. Berlin's 25 per
cent stake in Commerzbank's common equity is now worth only 2 per cent
less than the €1.8bn ($2.6bn) the German government paid for it.
spite of criticism of the bail-outs of lenders such as Citi, Bank of
America and Wells Fargo, the Treasury has reaped gains from the coupons
payable under the troubled asset relief programme bail-out funding,
most of which has been repaid.
If another big negative shock comes the government's liability position still could turn out to be much worse. But if we stop and click pause and evaluate the policy today — the answer to my question is "yes, the bailouts were a good idea."
Without the bailouts we would have had many more failed banks, very strong deflationary pressures, a stronger seize-up in credit markets than what we had, and a climate of sheer political and economic panic, leading to greater pressures for bad state interventions than what we now see. Milton Friedman understood all this quite well, which is why argued bailouts would have been a good idea in the 1929-1931 period.
(By the way, some libertarians like to pretend that Milton Friedman blames the Fed for "contracting" the money supply by one-third in that period but in reality Friedman blames the Fed for having let the money supply fall by one-third and not having run a bank bailout.)
If you are a libertarian, is not our current course more favorable for liberty than would have been a repeat of 1929-1931? If not, I would be curious to hear your counterfactual version of how matters would have proceeded, without the financial bailouts. Is it that you think the regional banks would have raised the financing to pick up the entire bag and keep the banking system afloat? Or is it that natural market forces would have somehow avoided a wrenching surprise deflation? Or do you think the authorities for some reason would have not nationalized the major banks? Please let us know.
Maybe you think that the bailouts will have disastrous long-run consequences. And maybe they will, I worry about this too. But if anyone should know that modern politics can only stand so much short-run panic, it is libertarians and fans of Bryan Caplan's book. If we had not done the bailouts we did, we would, within a few months' or weeks' time have received a much worse and costlier bailout run by Congress and Nancy Pelosi. How does that sound?
I can see that Peter Boettke, on his blog, periodically struggles with these questions. I speculate that Pete even toys with the idea that I am right and that Friedman, a founder of the Mont Pelerin Society, was right about 1929-1931. But I wonder if he can bring himself to utter those magic few words: "All things considered, the financial bailouts were a good idea. They would have been a good idea way back when and they were a good idea this time around."
Addendum: Megan McArdle comments.