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"Bankruptcy, not bailout, is the right answer"

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Commentary at CNN.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.
The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.
The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

I thought the editor's note was interesting:

Jeffrey A. Miron is senior lecturer in economics at Harvard University. A Libertarian, he was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan.

Not just economists, but academic economists. What? Universities opposing socialism? :)

In any case, it has been thrilling to see such an outpouring of rational opposition, especially given a cultural environment that usually favors emotionalism and hysteria.

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The author, Jeffrey Miron, an economics lecturer at Harvard, is also on the Glenn Beck show on CNN tonight and does very well.

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