It's Still Not Going to Work

President Bush excruciatingly tried this morning to explain the government's latest move to nationalize our banking industry, which he called temporary. If there is anyone who believes big government is temporary please quit reading now.

Probably the best summary of why the original $700 billion bailout won't work and why this latest move by the feds to buy up worthless stock to secure the banking system won't work either is Libertarian Jeffrey Miron's account posted on CNN.

Dr. Miron writes:

If banks were fundamentally sound but temporarily in need of cash, they could sell stock on their own to private investors. Few investors now want bank stock, however, because they cannot tell which banks are merely illiquid -- short of cash for new loans because their assets are temporarily sellable only at fire-sale prices -- and which are fundamentally insolvent -- short of cash and holding assets whose fundamental values are less than the bank's liabilities.

And that's the thesis of all this. If banks really needed the money they can already sell their stock to people wanting to buy them. So why force tax payers to buy the stock? It's because the stock is worthless and investors don't want to buy it, thus resulting in a collapse. So why in the world is it okay for tax payers to buy worthless stock and not investors?

In any event, government ownership of banks has frightening long-term implications, whether or not it alleviates the credit crunch.

Government ownership means that political forces will determine who wins and who loses in the banking sector. The government, for example, will push banks to aid borrowers with poor credit histories, to subsidize politically connected industries, and to lend in the districts of powerful members of Congress. All of this is horrible for economic efficiency.

That is absolutely correct. This will turn into a private slush fund for Members of Congress. Essentially all we have done is give Members our money to invest for us. We'll get no return and lobbyists and cronies will get the benefits.

Injecting $250 billion into the banking industry is not going to solve any problems. It's a long term nightmare. Where I'm going to disagree with Miron is that he calls this Crony Capitalism. It is not. It's socialism, he knows it, we all do. And that's what it would be called if a Democratic president had proposed this plan.