Tuesday, January 22, 2008

Why bail us out?

A good friend of mine asked me the other day, "Why do we always try to avoid recessions?" At first, I figured this was a stupid question. But after some dialog, he had some validity in his statement.

My answer last week was "if government can help by making credit easier and less expensive or give a tax relief, why not try to help out?" I made an analogy to having a headache. Yes you can sit and suffer, but why not take some aspirin to help with the pain.

His argument was that short-term help can damage the long-term. What he's saying is, why increase the federal deficient to try and lessen or avoid a recession today, when the long-term consequences could be far more drastic. Or why have an emergency interest rate cut like we did today, just to keep markets stabilized. As you can see he's from the school of "tough-it-out."

I sit in the middle. I don't think the government should bail us out. But I can't promote tossing people out on the streets to freeze to death because they can't pay their mortgage. In that same vain; I'm glad the fed cut interest rates today as it could have been (and still may be) a tumultuous day in the market. But at some point, the fed needs to let people "tough-it-out." If we've driven up the market to unsustainable prices, let them fall down to where they should be.

Like a good parent, government should provide some help when needed, but also let people learn from their mistakes.


Scooter said...

Despite my strong liberal leanings (I don't think people should starve, or have to worry about health care in a free market when there are alternatives that cover everyone, etc), I'm generally of the opinion that market forces should work themselves out. I also worry that government intervention, though meant to be helpful, can sometimes affect others who were doing the right thing (case in point, I worry that bailing out some bad mortgages might actually create more rental property - that's bad for me, particularly as my rental property has always been done by the books, financially speaking - no crazy mortgages, so if there's more, my ability to ride my margins decreases).

Then you look at the system and realize that there are foreign investors involved, and there's some suspicion about exactly how detatched from government involvement those foreign investment funds are...and then I ponder whether it isn't appropriate that the U.S. is trying to smooth things out, because if they didn't, countries without a significant disconnect between personal wealth and public wealth might be making the most of fluctuations.

I think it gets incredibly confusing because it's no longer just a national issue.

Mac Noland said...

You're right about the confusing part! I also tend to lean towards letting market forces work themselves out. However, like you said, I don't think people should starve just because they made a bad decision or two. So basically I'm wishy washy. That is, I can see both sides of the story and agree with both.