Wednesday, September 24, 2008

Bailouts and the Marketplace

One of my former students at USF - yes, Kellie I do remember you, and you too Lisa (they must think that I am very old and forgetful) - e-mailed me today and asked me the following: "... to explain the implications of this proposed bail out and how this gov't intervention will interact with the free market system we have."

This is a great question, but will take a lot of time to explain, so what I thought I would do would be to give a link from Greg Mankiw's blog (teaches at Harvard and has a very successful Prin. of Economics text). Mankiw has followed this story in great detail. I thought the last one on the list from the above website was very helpful.

Anyway, a good summary on the implications the Federal intervention in the marketplace is a quote by Luigi Zingales at the University of Chicago (and posted on Mankiw's blog).

"Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded? For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system."

Update: 9/29/08: Here is another good link: The Paulson Proposal: Economists' Views. (.pdf document)

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