The Volokh Conspiracy

A quick roundup of commentary on the bailout:

A front-page story in the Washington Post discusses the opposition by many economists to the bailout, including their doubts that it will actually even work: "Away from Wall Street, Economists Question Basis of Paulson's Plan."

Allan Meltzer, who I heard invoked about half-a-dozen times last night on tv, expresses his view here:

ALLAN MELTZER, Carnegie Mellon University: It's a terrible idea. It's undemocratic. It's bad economic policy, and it's bad social policy. And it has a very little chance of solving the problem in a meaningful way.

JEFFREY BROWN: Well, flesh that out a bit. Is it that we are not in a crisis? Or is it that government intervention of this kind is not the right answer?

ALLAN MELTZER: Well, I've listened to governments tell me for 40 years that there was a crisis and the world was going to fall apart if we didn't do this or that. But there have been a few cases where they weren't able to do that.

One was the commercial paper crisis in 1970. There have been several others. The world did not fall apart. Last week, we had Lehman Brothers went into bankruptcy. Within three days, most of the assets were sold.

We had AIG turn down three offers to buy the company because they thought they would get a better deal from the government. It turned out they didn't get the better deal from the government. Now the stockholders suddenly woke up and said — the major stockholders said, "We'd like to buy the company."

Well, that's what I think we need to do. We need to get the government's hand out of this, and let's see whether we can't get a market solution.

The market people caused this problem. They ought to be the ones that pay the cost of having it cleaned up.

One major justification/rationalization for the bailout is that Wall Street's crisis will trickle down to "Main Street" and lead to bank and business failures on the local level. Maybe this eventually will turn out to be the case. Yet today's Washington Post reports that community banks that were responsible lenders over the past decade are now thriving. They are flush with liquidity as depositors pour money into them and borrowers turn to them for credit. Community banks obviously cannot pick up the slack for financing for massive business transactions, so there may still be a problem there. But at this point it is not obvious that the rumbles on Wall Street will have the dire trickle-down consequences that President Bush warned of the other night when he told us that student loans, small-business loans, and car loans were in peril. In fact, it looks like there is at least some offset here:

At the same time, many smaller banks said they were actually benefiting from the problems on Wall Street. Deposits are flowing in as customers flee riskier investments, and well-qualified borrowers are lining up for loans.

"We collect money from local savers, and we lend it in the local community," said William Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, N.J. "We're doing fine. There are 9,000 financial institutions out there, and most of them are small and most of them are doing fine."

Dunkelberg, a professor of economics at Temple University and chief economist for the National Federation of Independent Business, added that a recent survey of that group's members found that only 2 percent said getting a bank loan was the great challenge facing their businesses.

"If you can't get a loan, my advice is to go see your local community bank," Dunkelberg said.

***

We're drowning in liquidity because people are pulling money out from other places and depositing it with us," said Peter Fitzgerald, chairman of Chain Bridge Bancorp in McLean. "Our bank has benefited tremendously."

Fitzgerald, a former senator from Illinois whose family has been in the banking business for generations, said the current situation struck him as similar to past downturns.

"The banking system did need to slow down," Fitzgerald said. As it does, riskier customers are being turned away. At the same time, banks that overextended are now forced to turn away even good customers. The challenge for Chain Bridge, he said, is identifying the worthwhile customers. The bank has plenty of money to make good loans, he said.

Nor are small bankers the only ones who object to the bailout. John A. Allison, CEO of BB&T Bank, also objects to bailing out irresponsible bankers (HT: Division of Labor):

There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.

While all financial intemediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.

Corrections are not all bad. The market correction process elminates irrational competitiors. There were a nubmer of pooerly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post "rescue" punish the poorly run institutions and not punish the well run companies."

Finally, he adds an observation that expresses a conern that I have shared from the beginning, which has led them into missteps and unintended consequences already:

The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The deicison to protect the money funds is a clear example of amaterial lack of insight into the risk to the total financial system.

In fact, the community bankers mentioned above tend to vacation at the Jersey Shore rather than the Hamptons, and fly commercial rather than charter, so Mr. Paulson may not actually have had the opportunity to speak with them about the bailout. (Sorry, I couldn't resist at least one dig.)

Finally, the Austrian economics community is having a field day with the bailout. Steve Horwitz observes "Competition sucks if you're one of the competitors" and that what is good for Wall Street is not necessarily good for the economy as a whole. Crony capitalists, Horwitz argues, crave stability (especially when that allows them to keep gains and socialize losses) rather than dyanamism.

Peter Klein comments on the underlying monetary causes and the inevitability of market correction in "What would Hayek say?"

And Larry White adds : "Capitalism in which AIG never closes down is like American Idol in which Sanjaya never goes home."

Finally, the best line of the night last night (that I saw) went to Congressman Ron Kind who said that phone calls to his office were "running 50-50--50% 'No' and 50% 'Hell No.'"

Let's see what fun today brings.