Bailout thoughts

In 2008, the US government spent a large amount of money bailing out financial organizations troubled as a result of the subprime mortgage crisis. The fiscal conservative in me thinks that maybe socializing losses isn't such a good idea, and that doing so will cause the invisible hand to engineer boom and bust cycles to siphon large amounts of public money towards private financial institutions again in the future.

On the other hand, the consensus seems to be that it has worked, things are looking up and it cost less than expected, so maybe it was the right thing to do.

I remember reading at the time about the disasterous consequences that were predicted if TARP wasn't passed - banks would fail, making it very difficult for ordinary businesses (who didn't cause the crisis) to get credit to grow and/or continue operating.

The obvious answer is to let the banks fail and to bail out these innocent businesses instead - lending to them directly instead of lending to the banks so the banks can lend to the businesses. But figuring out which businesses are good ones to lend money to is a rather complicated and difficult process in itself - one that the government isn't really set up to do. It makes perfect sense for the government to outsource that work to private institutions (i.e. banks) who were doing it anyway (and not doing altogether too bad of a job at that side of it).

On the other hand, how can we stop this happening again the future? I think the answer is to tie bailout money to the enacting of regulations designed to stop this happening again. In particular, for the current economic crisis it seems like the conflict of interest between credit rating agencies and the issuers of securities was a major cause, and I suspect that well placed regulations there could prevent similar crises.

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