Quote Of The Day

“Not only are government subsidies for government tuition unnecessary, they also victimize the truly disadvantaged people in our society: those who lack the educational qualifications to go to college in the first place (usually due to a combination of poor public schooling and a flawed family environment). These people pay some of the taxes that support subsidized tuition for college students who are likely to end up far wealthier than they are. They are also indirectly harmed by the diversion of public funds to tuition subsidies and away from other priorities that might do more to advance the interests of the truly poor. Government tuition subsidies are a classic example of a policy that redistributes wealth to the relatively affluent under the guise of helping the poor.” — Ilya Somin, Assistant Professor at George Mason University School of Law blogging at the Volokh Conspiracy

5 Responses to “Quote Of The Day”

  1. TacoSam says:

    HP, I know this is off topic, but since you are strong proponent of “free markets”, what do you think of the Fed’s “bailout” if you will of Bear Stearns? I understand the Fed agreed to guarantee the obligations of Bear Stearns as part of the agreement for JP Morgan to acquire Bear Stearns. Was Bear Stearns so big that the government could not let it fail? What do you think of the government’s intervention?

  2. Instinctively, as a free market guy, I have an averse reaction to government bailouts. So I would be predisposed to be against it.

    However, the banking industry is a complicated case. Banking, especially in a global market, is such a fundamental part of the economy that if it collapses you can expect to have serious ripple affects throughout the economy – and in todays markets, that would mean throughout the whole world. So letting the banks fall is tantamount to letting the whole economy fall.

    The case with Bear Sterns involved trust. Remember, banks depend on trust. Without that, people rush to pull accounts and new accounts cease. Everybody becomes afraid to enter into transactions for fear that the other side won’t hold up its side of the bargain. The whole thing comes crashing down.

    Bear Sterns probably has in the millions of very complicated (derivatives like swap, option, forward) deals on their books. Very difficult stuff to understand and under chapter 11, some judge would have to try to make sense of it all, and sign off on all substantial financial transactions. Do you think a judge, any judge, can do this accurately and fairly? I certainly don’t…and I’m sure the market does not either (which is why you saw their stock tumble so rapidly on Friday). So what to do?

    Remember, if individuals doing business with Bear Sterns didn’t trust that the court would stand behind each transaction, then they would not trust Bear Sterns during a chapter 11 bankruptcy. This lack of trust would be the same as no deal, and the bank would evaporate.

    So in steps Bernanke (a free market and right leaning economist himself btw) and underwrites some of Bear Sterns accounts while approving the purchase by JP Morgan. This restores trust and prevents a bank run. All necessary to keep the economy from falling into what could be a very severe recession.

    Some economists I trust take on the issue, here, here, here, here, here, here, here, and here.

    Sorry for the late reply…its finals week at school and I have this really ugly project due on Friday.

  3. TacoSam says:

    Good luck with finals. Always take care of business first and play later.

    Most issues I think are never black and white. I think your comments illustrate that there is always a gray area like this. That is why I am suspicious of arguments that propose an “absolute” resolution that applies to all situations. For example, those arguments that say we must always have “free markets” all the time with no government intervention.

    I tend to agree with your comments. However, there is no free lunch. I was watching/hearing CNBC The Call this morning as I was getting ready for work and they were discussing how the Fed agreed to “bailout” Bear Sterns, but in exchange has today proposed more government regulation of the markets. The funny thing was, the headline/logo splashed on the corner of the screen for the discussion was “Government Gone Wild”. If the Fed had done nothing and allowed Bear Sterns to be the first of many dominoes falling down, these same critics would be crying out loud that the governement did not step in to do something.

    My former roomate in grad school used to work for the Fed for many years after we graduated. Actually, while we were in school, he was part of a team that went down to Chile to help re-write their Banking laws. He met with their Finance Minister and the whole thing. He now works for a private bank. Anyway, we have some good discussions on these types of Economic/Monetary Policy issues since he has inside knowledge of how the system really works. I always try to learn from him, but his knowledge goes way beyond my level of knowledge on the subject. Still, I am happy to get some crumbs of knowledge.

    I will try to check out the links you provided as I have time. Thank you.

  4. Marcos says:

    With respect to the “complications of the banking industry” your response is a classic hypocritical right wing response; unless it benefits major corporations it’s bad. So the lesson is government help to banking industry “good” helping poor people get an education via tuition subsidies “bad.” If you and your right wing conservative hypocrites really had and balls you would believe in a true free market. If a bank collapses it is because it is weakly ran and was not competitive, market forces would either create an alternative institution or a better run bank. As for the economy “collapsing” well that’s too bad; new markets, institutions, entities etc would form via the invisible hand. But of course, the gutless right wing bush-o-crats and their corporate monopolistic cronies won’t let that happen. That is why we are still dependent upon antiquated markets like the oil trade. So in the end it is about preserving a failing system and not about the free market or capitalism for that matter.

  5. TacoSam,

    Yeah, there certainly are not easy absolute rules like ‘government is always bad’ but there are tendencies. As this post shows, the movement towards more free markets and less government has, undoubtedly, made the world a better place. A few generations ago people actually thought that an economy fully controlled by the government, communism, was viable. Now only a small ignored segment of the left does.

    With that said, I still think its somewhat misleading to call what the fed did a bailout, atleast in the traditional sense. As one of the links I linked to said, “this wasn’t a bailout; it was an orderly winding-up of business”.

    What the fed did was guarantee a certain amount of Bear Sterns holdings and eased the transition for JP Morgan, a private enterprise, to purchase the company. And unlike traditional bailouts, in this case, the fed has a chance to actually make some money off the transaction.

    With that said though, I am generally against bailouts by the government in any fashion. My only point here is to say that the fed did this, compared to traditional bailouts, in the least market intrusive and most efficient way possible, and for more noble goals (save the economy, vs mere save the company).

    I’m curious TacoSam, you mention your old grad school roommate “was part of a team that went down to Chile to help re-write their Banking laws”…did you by any chance go to the University Of Chicago? Was he part of the Chicago Boyz under Milton Friedman?


    I am very consistent in my beliefs. Not only do I demand competition amongst “major corporations” but I also demand competition amongst education for the poor. I do not think it is mere coincidence that our public schools in the ghetto are the worst in the country and also happen to have the greatest monopoly power of all. Competition is great…at the top and at the bottom.

Leave a Reply