Over at Marginal Revolution Tyler Cowen asks Were the bailouts a good idea? Cowen argues that in hindsight, we should consider the bailout to have been successful in averting a financial meltdown of the US economy. Specifically he asks whether Peter Boettke, of the Austrian Economists blog, can bring myself to admit this. Boettke has now replied. Boettke writes,
The basic point I would like to make is that those long-run negative consequences that Tyler admits in his post might cause problems (perhaps even serious ones) are in fact problems. The cycle of deficits, debt, debasement doesn't just cause economic disturbances against a long-term growth trend, it has historically destroyed the economies of nations. If what the bailout and shift in both the traditional role of the Fed and Treasury perform have done is unleash this cycle of deficits, debt and debasement rather than constrain it (as it obviously has done!), then we have sent our national economic policies on a path of ruin that may well set us back for decades.He ends by saying
But there is more to my hesitation than just this issue of short-run and long-run consequences as can be gleaned by following the commentary I have made throughout the history of the debates over the financial crisis. I have been consistently against the bailout, and critical of Fed and Treasury behavior in general. Government activism isn't the cure for the crisis, it is the cause.
But expediency tends to defeat principle in political discourse, because of the focus on direct and immediate effects whereas principle tends to focus on indirect and long-run effects. Was it expedient to pursue the bailout? Of course. But was it a policy move that followed a working principle of public policy? Of course not. And once we include those indirect and long-run negative consequences the assessment of the effectivenss of the bailout on averting disaster is not as easy as Tyler suggests.In the comments to the Boettke post Steve Horwitz writes
[...] but I've never, ever suggested that "bailing out" the banks was even the right second-best policy. Banks should have been allowed to fail if they made bad investments. Adding reserves into the system to prevent the money supply from falling and leading to more, economically unjustified, bank failures is a different matter.I feel Horwitz is right, there is a difference between saying the Fed should have done nothing and saying bank shouldn't have been bailed out. The bailouts were not a good idea, just think of the moral hazard problem this has created, while there may have been more justification for the Fed acting to prevent the money supply from falling.
So I have no problem at all saying "banks shouldn't have been bailed out," but I think that's a different idea from "the Fed should have done nothing."
Update: Matt Nolan writes on Bailouts, moral hazard, and the money supply.