I have written about the bailout several times, but I think I need to make one final point, and make it as clearly as possible. If we attempt to put off the problems these failed loans will bring about, we will only make matters worse.

The bad loans are effectively an increase of the money supply. Not all measures count credit, but as loans backed by over valued properties, unlikely to ever be repaid, but being counted as assets by those holding them, these loans effectively represent paper increases of the national wealth. So, when those likely to default, or already in default, are counted as having a value of zero, it will have the same effect as a contraction of the money supply. And it is this deflationary pressure which is the real justification of a bailout.

Were the problem only that a few banks might fail, or even a substantial number of investment firms go under, I would argue that there is no possible justification for a bailout. Those who bought these high risk mortgages knew the risk, as did those who invested money with them hoping to benefit form high returns. High returns almost always mean high risks, so I have no sympathy for those who benefit from high returns then expect to be bailed out when the risks finally catch up with them. The demand to do so is akin to asking a casino for a "do over" when you hit on 19 in black jack. You took the gamble, you face the consequences.

However, the deflationary aspect of this makes me think twice about keeping the government out. My first essay on this topic went into greater detail, but there are some sound arguments that allowing a contraction of the money supply can cause harm out of proportion to the original misdeeds. And, given our already somewhat anemic economy (though nowhere near as anemic as the press or the Democrats make it sound), adding the pressures of a monetary contraction could cause a full scale recession or depression. So, there is a valid argument for bailing out these firms, even if they are themselves to blame, as letting them face the consequences could do enough harm that it is worthwhile to save them from their own mistakes.

At least those were my thoughts at first, until I looked at history, and at the mechanics of the bailout. There are, historically, four ways we could handle such a bailout. We could increase taxes, we could cut spending, we could borrow, or we could print money*. From my knowledge of history, as well as the current political environment, and the recent example of the S&L bailout, we are not going to do either of the first two options. We certainly aren't raising taxes when both parties are running on promises of some sort of tax cut. And we have a hard enough time cutting spending when we have a revenue shortfall, is it going to be any easier when it is simply to remedy an economic problem?

So, we are going to either borrow money or print it**. Provided the loan is not going to be repaid with increased taxes or reduced spending, it too is effectively an increase in the supply of money, and so, in the end, our solution is to put off a present contraction by inflating the money supply more. As I said before, provided there are no more increases of the money supply, eventually economic growth will catch up with this inflation and render it relatively harmless. But, as I know that there will be future increases, that means that we are simply postponing our present deflation by setting the stage for a larger future collapse.

And that is what history teaches over and over, that efforts to avoid facing consequences today always result in a worse future. Hoover's efforts to handle the 1929 crash made the depression worse, and FDR's even more intrusive measures made it worse still. Likewise, Carter's attempts to postpone facing the consequences of Nixon's Smithsonian Accords brought about the "stagflation" of the Carter years, as well as the early 80's collapse that troubled the early Reagan years. And even more recently, we can see in the early years of the Bush administration the small economic slump that was the result of Clinton's efforts to shore up an economy damaged by the bursting dot com bubble.

So, with the choices we have, and considering how small the loans are in comparison to the total money supply, and given that our "recession" is nothing of the kind, I say we should do nothing. No bailouts, no special protections, no forgiveness, nothing. Let the economy sort it out. There is no reason for the government to make any more of a mess than it already has, and every reason for it to stay out.

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* I am not saying paying for these bad debts by decreased spending or increased taxes is a fair solution, only that it avoids the harm done by trying to solve these problems through inflation. I think it likely is best to face the music now, and it certainly is most fair to make those who profited the most suffer the most, but that does not change the fact that, were we to settle on a bailout, doing so by taxing or decreasing spending is the best approach to bailing out these companies and individuals.

** Actually, the way open market operations work, printing money is still handled on the books as if we borrowed money, since the government issues bonds which it then "sells" to the Federal Reserve in exchange for newly created credit.

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POSTSCRIPT

My earlier essays on the same topic are (in chronological order):

Bringing Some Good Out of Our Financial Problems
Direct Your Anger Properly
Some Brief Thoughts on the Bailout
Living Beyond Their Means
A Question
Face The Music, Don't Try to Buy Votes

There is much more on the subprime and housing "crises", but the list of links would be far too lengthy.  Try the Townhall search engine.