Thursday, September 25, 2008

Steven Landsburg argues that we don't need a bail-out.
In the 1930s, a wave of bank failures did make it hard for borrowers and lenders to find each other, and the consequences were drastic. But times have changed in at least two relevant ways. First, the disaster of the 1930s was caused not just by bank failures, but by a 30% contraction of the money supply, which is something today's Fed can easily prevent. Second, as any user of can tell you, the technology for finding partners has improved since then. When a firm wants to raise capital, why can't it just sell bonds over the web? Or issue new stock? Or approach one of the hedge funds that seem to be swimming in cash? Or borrow abroad?

I find this argument very appealing; I just don't know enough about the financial sector to evaluate these empirical claims. For example, Greg Mankiw has posted an anonymous defense of the Paulson plan, claiming that Wall Street economists better understand the situation than other economists, and that action truly is needed. And the posts over at Calculated Risk sure sound scary.

What's also scary is that I don't think Congress is any better at determining whether a bailout is needed than I am.


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