Tuesday, March 25, 2008

Bailing Out of Profit and Loss

The Federal Reserve bailout of Bear Stearns is interesting.

US News and World Report gives us a column on What Taxpayers Get from the Bear Stearns "Bailout". It is an interesting assessment of why the bailout is a good idea. I certainly see the upside and am glad that it has the potential to help out with some of our country's financial problems.

On the other hand, NPR has Does the Bear Stearns Bailout Set a Bad Precedent? This article provides a coherent view of my initial thoughts on this issue. I am not an economist, but it seems to me that when you take away the loss side of risks, then you screw things up completely. Here is a quote from Milton Friedman:
The economic miracle that has been the United States was not produced by socialized enterprises, by government-union-industry cartels or by centralized economic planning. It was produced by private enterprises in a profit-and-loss system. And losses were at least as important in weeding out failures as profits in fostering successes.
Take note of that last part: losses are an important part of the capitalist system. If the fed bails out everyone who takes a big risk, then why will people not keep taking bad risks in the future? There is no downside, so why not? Don't get me wrong...I see the upside of the bailout. Many normal folks will be helped by it, but I am concerned about the long-term ramifications on our private enterprise profit-and-loss system.

Soundtrack: Bill Evans (Everybody Digs Bill Evans)

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