Doing Nothing

The Virtues of Inaction



Despite the promise from the White House and Democrats in Congress that if we passed the massive spending and bailout bills that unemployment would not rise above eight percent, it is now at 9.5 percent with no sign of going anywhere but up. Yet apologists for the spending still claim that despite the growing evidence of failure that action has to be taken because something simply had to be done. But did it really? As Jeffrey Miron explains in the latest copy of Reason, there was always the option of doing nothing:

The first thing to note about the financial crisis is that the federal government never had any business intervening in the personal decision of whether you want to own a home. There is no rational economic argument, or any argument I know of, that says the market of buying and selling homes is imperfect in some way, requiring government action. Construction firms have plenty of incentive to build homes and sell them. People who have the wherewithal have plenty of incentive to buy homes if they so choose. For the government to intrude into homeownership was an off-budget, nontransparent, backdoor attempt at redistributing income. And when the policy became a way of transferring income to people who couldn’t afford those homes, it was doomed to failure.

When people try to pin the blame for the financial crisis on the introduction of derivatives, or the increase in securitization, or the failure of ratings agencies, it’s important to remember that the magnitude of both boom and bust was increased exponentially because of the notion in the back of everyone’s mind that if things went badly, the government would bail us out. And in fact, that is what the federal government has done. But before critiquing this series of interventions, perhaps we should ask what the alternative was. Lots of people talk as if there was no option other than bailing out financial institutions. But you always have a choice. You may not like the other choices, but you always have a choice. We could have, for example, done nothing.

By doing nothing, I mean we could have done nothing new. Existing policies were available, which means bankruptcy or, in the case of banks, Federal Deposit Insurance Corporation receivership. Some sort of orderly, temporary control of a failing institution for the purpose of either selling off the assets and liquidating them, or, preferably, zeroing out the equity holders, giving the creditors a haircut and making them the new equity holders. Similarly, a bankruptcy or receivership proceeding might sell the institution to some player in the private sector willing to own it for some price. With that method, taxpayer funds are generally unneeded, or at least needed to a much smaller extent than with the bailout approach.



Bailouts took money from the taxpayers and gave it to banks that willingly, knowingly, and repeatedly took huge amounts of risk, hoping they’d get bailed out by everyone else. It clearly was an unfair transfer of funds. Under bankruptcy, on the other hand, the people who take most or even all of the loss are the equity holders and creditors of these institutions. This is appropriate, because these are the stakeholders who win on the upside when there’s money to be made. Distributionally, we clearly did the wrong thing.

From the perspective of long-run efficiency, the question is also relatively straightforward. By the end of 2005, it should have been apparent that the U.S. economy was fundamentally misaligned. We had significantly overinvested in housing and significantly underinvested in factories, plants, and equipment. In effect, we needed a recession: a period to readjust the balance between the different types of capital.

More broadly, failure is an essential aspect of free markets. Failure shows capitalism is working, because it means resources are moving from bad uses to good uses.

It is becoming obvious that the government's spending programs are actually making things worse, and have had the effect of prolonging the recession, not ending it. Yet there is growing talk in Congress of yet more stimulus spending, which is just more of the same bad medicine.



Homeless Chic

Thanks to the bad economy created by bad government policies, there are a lot of people in the area living in tents, as revealed in this photo montage by Paolo Mastrangelo of a tent encampment in the woods of Northampton.



Living in a tent might be fun for a weekend, but it's got to suck for much longer than that. No running water? No electricity? No thanks. However, perhaps the electrical problem can be solved thanks to this new tent using the latest in solar technology.



The Orange Company today revealed their vision for the tent of the future. Utilising cutting edge eco-energy technology, the Orange Solar Concept Tent will allow campers to keep in touch and power their essential camping gadgets. Latest research shows that by weaving specially coated solar threads into conventional fabric, revolutionary new ways of capturing the sun’s energy could soon become a reality. These radical advances mean that rather than relying upon familiar fixed panels, designers were free to conceive how a tent of flexible solar fabrics might look.

Providing the homeless with an electric tent may be expensive and inadequate, but it may also be more affordable than other short term solutions. I predict the electric tent will become a useful tool in the struggle to provide housing for all.

Everybody's a Comedian

Massachusetts Senator and failed 2004 presidential candidate John Kerry is not known for his sense of humor. In fact, his generally unfunny manner was blamed in part for the failure of voters to warm up to him in 2004. So it is a surprise to find this funny little blurb attributed to him in a Men's Journal article on jet lag:



“I can’t say my past experiments with jet lag remedies have been very scientific. When I’m flying, I usually take an Ambien and listen to one of my own speeches on my iPod. I’m out in seconds. But it doesn’t always work, and sometimes you’ll have some funny moments from being overtired. There was an incident in New Orleans, at Mardi Gras, in 1997. But the video has been destroyed and I gave the beads back.”

- Senator John Kerry, chairman of the Senate Foreign Relations Committee

Daddy?

Speaking of Kerry, the first photo has surfaced of former Senator (and Kerry's 2004 Democrat Vice Presidential nominee) John Edward's alleged love child. He admits he had an affair with the child's mother, but claims the kid isn't his. What do you think?



While the photo is not a dead ringer that Edward's is the dad, it also offers nothing to disprove it. Interesting that Edwards's won't just submit to a blood test, which would settle the matter once and for all. But maybe that's because he already knows how the test would come out.

Time

Once upon a time people would rely on bells ringing around town to help them keep track of time. This old bell tucked away under a staircase in the Northampton courthouse was made in 1823 by the foundry founded by Paul Revere.



We moderns rely on things like the clock at the corner of Main and King Street in downtown Hamp. Unfortunately it hasn't been very reliable lately, either turned off or with so many bulbs out in the numbers that you couldn't be sure what it said. Now that's changed with a brand new digital version that doesn't rely on light bulbs!



Nothing preserves time like photographs. Blogger and music dude Jim Neill apparently had a normal Valley upbringing (if there is such a thing) with the exception that he had the sense to take pictures. Here he is in Northampton's Pulaski Park in 1982.



This is an undated photo he released recently of the old Funhouse at the former Mountain Park in Holyoke.



I love the motto on the front, "It's fun to get lost!"

I think I had too much of that kind of fun, and I ain't talkin' about Mountain Park.

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