Tooth-Fairy Economics

28 October 2008 at 2:22 pm Peter G. Klein 2 comments

| Peter Klein |

Art Laffer offers this succinct summary of Bernankeconomics:

No one likes to see people lose their homes when housing prices fall and they can’t afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house’s value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

But here’s the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn’t create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don’t believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they’ll do with Wall Street.

Entry filed under: - Klein -, Bailout / Financial Crisis, Classical Liberalism, Public Policy / Political Economy.

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2 Comments Add your own

1. ckstevenson | 28 October 2008 at 6:28 pm

But banks and homeowners DID share with taxpayers when homes appreciated (channeling Lee Trevino in “Happy Gilmore”). They did so via taxes on the sales of properties, on the profits of the loans, and on increased properry value taxes.

Let’s not act like we weren’t all collectively complicit. The royal we were the one’s buying and selling the houses, the business people making the loans and the governments gleefully collecting taxes.
2. constituentresponse | 31 October 2008 at 3:50 pm

The point at which we should have been worrying about economic silliness has long since past. Corruption and fantasy has become so endemic, is it even possible to imagine an honest America grounded in reality?

We can at least aim to rediscover that country by throwing out the bums who started this slide down the slippery slope — all of them — Dems and Republicans alike. (There isn’t an ounce of difference between them anymore anyway.) Could the Libertarians or Greens really be any worse than this?

On Tuesday we need to vote “no” against incumbants who voted “yes” for the Bailout. If you don’t know who they are, check out the Constituent Response Team’s “Bailout Vote Map” at constituentresponse.com/congress .