I was pleased last night to hear Congressmen Kevin McCarthy and Devin Nunes, both from my part of CA, on local radio last night talking about he financial crisis and the bailout, and they were great. I heard an LA area radio host say “the scariest thing is that Congress doesn’t seem to know what to do.” That is right. All the people running around saying if we just do X we’ll avoid the worst of the crisis (X=buy up bad credit, bailout big banks, whatever) are talking through their hat. We know we are going to have to go through some economic pain. We are not going to have a depression. That is all we really know. All the grandiose plans proposed by Paulson and some in Congress are far more likely to do lasting harm than even temporary good. The great lesson of the post WWII period is that you cannot centrally plan your way out of an economic downturn. So yes, there will be some pain, some losses. We made credit too cheap, and now it is a bit too dear. Until we get back to the right point, we face some tough times. Better to ride it out now than let a bailout turn it into a bigger and longer run mess. Some useful things to look at. My colleague Mike Flynn explains how we got into this mess. At this 2004 hearing, regulators report that Fannie Mae and Freddie Mac need more oversight and regulation. In a partisan debate, Republicans push for this, and Democrats insist over and over again that there is no problem, that there is no need for more oversight. We know now who was right. Watch a short video here of parts of the hearing. A great critique of the bailout idea by a Harvard economist on CNN.com. “The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.” And this from the Washington Times. “What we have seen is not a failure of free-market democratic capitalism, but another failure of a government that destroyed the normal market mechanisms for dealing with risk. There have been many calls for the “greedy” to be punished, but the political “greed” for power and money is even more dangerous than excesses practiced by occasional business people”