Harvard Economist: Let the Banks Fail - No Bailout is Best

One of our alert readers from the Left Coast (which may become the Right Coast if all of Wall Street fails) pointed out that there are many good arguments for no bailout.

One Harvard economist and a libertarian argues that bankruptcy, not a bailout, is the best solution to the problem. He says that in bankruptcy, the good assets would be sold off and the shareholders would lose all their equity. But that the economy would move forward. [Article here.]

Let me tell you that there is an appeal to that argument. I certainly don't trust the government to do much. I trust the free market. I want to believe that is the answer.

But is that too easy of an answer? Remember, even with conservatives there is a place for government. Can you imagine your town if there were no roads built by government. What roads would there be if a road was only built once enough neighbors got together and chipped in several million to build a paved road?

And what if we only had a military when enough of the neighbors' kids decided that they needed to buy some guns and go fight the enemy?

And what if we only had electricity after the neighbors chipped in enough to build a power plant for your subdivision?

While I hate government involvement, fluid markets and solvent banks is a necessary infrastructure to existing in today's world. Between the civil war and 1900 - a period of 35 years - with no central liquidity maker, America suffered 8 recessions - despite amazing economic growth as a nation.

There are few things worse than not having a job when you are ready able and willing to work. Especially if it is because of economic conditions way beyond your control. And when people don't have jobs, housing, and food on the table - which they have earned - they are ripe for fanatics' ideas.

We all remember (or remember hearing about) the great depression. What we may have forgotten is that those years also spawned communism, Naziism, fascism, the USSR, Nazi Germany, the Japanese aggression, WWII, the rape of Nanking, death camps, millions dead, and ultimately the detonating of atomic bombs and the start of the cold war.

Would these things have happened without the financial collapse of the 1920's? Maybe. Bolsheviks came into power as early as 1917. And the capacity for man to commit evil seems to know no bounds, but the petri dish of the 1920s was certainly ready to give great growth because of the dire times.

So I hate it. I hate supporting anything that grows the government. But like chemotherapy, while the medicine hurts as much as the disease, it looks like we need to take the medicine to be able to see another day.

Ground up peach pits, another helping of vegetables, or magnets will not in my opinion cure this disease. Let's be adults and take the medicine while it can still work.

UPDATE: I just heard Rush Limbaugh make a good argument for no bailout: There is no surplus to pay for the bailout, therefore we are just creating a larger deficit. That certainly sounds appealing to my ears, but I still wonder what happens when we don't move and cure the problem when we had time.