My summary of Bush’s address tonight, which I just heard on the radio, is that the problems started about 10 years ago, when foreigners flooded the economy with investments. This spurred much positive economic activity, but it also created much moral hazard, causing individuals and firms to take out loans they never should have, and especially creating a housing bubble that threatens to ruin our banking system. So, while it goes against the president’s heartfelt belief in markets, there is no choice but to bailout troubled banks until the economy can rebound. It is not pleasant, but in the long run, we may even make a profit in the process.
Will this argument work? Despite its duplicitousness–markets didn’t create all that moral hazard on their own, foreigners didn’t create all that credit, and the Main Street that he wants to help will also be footing the bill–the answer is that it depends on whether Bush was successful enough in convincing the public that further and long-standing damage to the economy will result if Congress does not approve his plan. We can assume that no one putting these schemes together anticipated the overwhelming negative response from the public up to this time, thus necessitating tonight’s address. More than $700 billion in wealth transfers are in the balance.
Perhaps one shouldn’t be surprised with Bush’s argument–Hoover made a similar one to justify his White House Conferences in 1928 and 1929–but it does support the Austrian notion that inflation proposed today is always the supposed cure for problems caused by inflations past. If only someone would address why, this time, the current inflation won’t produce the same harmful effects at some point in the future.