Monday, September 22, 2008

Re: Opposing The Paulson Plan   [John Hood]

Rich,

I understand that a governmental response to financial panic may have a political necessity that forces lawmakers to act in bothersome ways. But that doesn't mean the act itself has to be panicky and muddle-headed. There are quite a few alternatives to granting the next treasury secretary — remember, it ain't Paulson — unprecedented power over a wide swath of the American financial system. It is, indeed, possible to make a bad situation worse by adopting poorly thought-out policy responses, as the Cato Institute's Alan Reynolds explains with regard to the unnecessarily expansive AIG takeover.

The Brookings Institution's Douglas Elmendorf offers what seems to this free-marketeer to be a better proposal than what's currently on the table if you assume federal intervention. Elmendorf argues for equity investment in financial firms rather than having the government buy select assets for (eventual) resale. At least this would prevent central planners from trying to guess at which assets are "bad" enough to buy, but not so bad that they shouldn't be bought, and to fix prices on assets that the financial markets can't make heads or tails of.

There are lots of good reactions this morning over at the American Enterprise Institute, too. Obviously, this is a complex problem. Obviously, confidence in world financial markets can have a quicksilver quality, and the downside is plenty scary enough to justify reassuring action from our leaders. But make no mistake: it is quite possible to do more harm than good, even if — one might say especially if — people are panicky and confused to start with. My suggestion is that in seeking to grapple with the challenge, conservatives start with some basic operating assumptions:

1. No matter how good or necessary it may sound, any idea to vastly expand government power that was hatched over a few days should be suspect. It's probably wrong in particulars, if not in generalities.

2. No matter how good or necessary it may sound, any idea to grant vastly expanded federal power to persons yet unknown — just weeks before a presidential election — should be suspect. It doesn't take much imagination to see just how terrifying this could be by, say, February.

3. Any plan to force American taxpayers to bail out big business or freaked-out rich people should be suspect. Given the imbalance of political and lobbying power, it's not hard to figure out who will likely come out on the short end of the stick. 

09/22 12:16 PMShare