Subprime Mortgage Crisis Solutions Debate - Government Bailouts - Arguments Against Bailouts

Arguments Against Bailouts

• Signals lower business standards for giant companies by incentivizing risk
• Creates moral hazard through the assurance of safety nets
• Instills a corporatist style of government in which businesses use the state's power to forcibly extract money from taxpayers.
• Promotes centralized bureaucracy by allowing government powers to choose the terms of the bailout
• Instills a socialistic style of government in which government creates and maintains control over businesses.

On November 24, 2008, Republican Congressman Ron Paul (R-TX) wrote, "In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me.... It won’t work. It can’t work... It is obvious to most Americans that we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians."

Nicole Gelinas, a writer affiliated with the Manhattan Institute think tank, wrote in March 2009: "In place of a wrenching but consistent and well-tested process of winding down a failed company, what have we chosen? A world of investors who can never be sure, in the future, that if they put their money into a company that fails, they can depend on a reliable process to recoup some of their funds. Instead, they may find themselves at the mercy of a government veering from whim to whim as it reads the mood of a volatile public...In saving the remnants of failed companies from free-market failures, Washington may be sacrificing the public’s confidence that the government can ensure that free markets are reasonably fair and impartial. One year into an era of exhausting and arbitrary bailouts, it’s not clear that our policy of destroying the system in order to save it is going to work."

Bailouts can be costly for taxpayers. In 2002, World Bank reported that country bailouts cost an average of 13% of GDP. Based on U.S. GDP of $14 trillion in 2008, this would be approximately $1.8 trillion.