A reader recently sent me some questions about the trouble in the financial markets that I think are good concerns free market believers need to address. The marketplace of ideas, and it is arrogant to dismiss other perspectives without careful thought. Sometimes they can poke legitimate holes in our theory, other times make us think carefully about what we believe and establish a firmer understanding.
1. "I'm concerned about the ability of the RSC's (Republican Study Committee) plan to get enough liquidity into the market fast enough to avoid having credit availability come to a screeching halt."
(Check out the RSC's plan at the end of this blog post from earlier today)
The credit markets are already at a near stand still, and will remain there unless the regulations keeping them down are lifted. The fact is that it will take weeks–maybe months considering how the government works–for the bailout to hit bank books. The Treasury will have to hire people to assess everything and make the right choices. So the speed may wind up being the same no matter which they choose.
Still, even if the credit markets stayed down a bit longer it wouldn't be the end of the world (despite what Paulson says). If people can't get loans, Americans will innovate. Perhaps we'll see the rise of something better. We can't calculate unknown value we destroy by overreacting.
2. "I don't see any concrete figures in your summary of the RSCs plan. Will these plans really free up the market of all of the low value mortgage backed securities?"
I don't have the numbers from their plan, but most of it is principle. The plan calls for cutting taxes in several ways that we may not be able to fully measure from the start but principally will free up an unknown amount of cash. We could measure all the capital gains tax break dollars by assessing all the banks books, but we can't know how much money the repatriation tax will bring in. But we do know that there is well over $700 billion in corporate profit out there that can come back.
The nature of being capitalist, lassie-faire, is that we have to admit that "we don't know" everything. And we can't know everything (to try is central planning–or socialism). We can know there is a base minimum from this plan that will help get us back on the right track and stays principled to what has made this country strong.
3. "What about the PR work that has been done to change the public's view on the White House's plan from a 'bailout' to an 'investment?' Would the plan really be that bad if the government made money from the selling of these securities?"
I would challenge you to think hard about the idea of an "investment." Economists have a term called "moral hazard" that refers to a distorted profit motive based on government action. The government should NEVER be investing money into the economy with taxpayer money because of what that does to future perceptions of the role of government. If they do make a profit will they stop? Why stop? Why not try more taxpayer money? Will is always work? It is a moral hazard we should avoid at all costs.
Furthermore, the government should not be make a profit with the people's money because it inherently involves risk, and the free market principle is that my money should be my money and if I don't want to risk it as a business investment I shouldn't be forced to. The government can tax me to provide legitimate services that only government can provide, but otherwise should not be taking my money to use for others because it kills my incentive to create value for myself, which hurts society as a whole.
If the government wants to invest a more acceptable measure is offering tax breaks to innovators to encourage private sector investment. This goes for anything, from solving the financial crisis to encouraging breakthroughs in science and technology.
If you have similar questions feel free to write me at email@example.com