[...] necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. [...]if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The cost...

[...] necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. [...]if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on t...

most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.” http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html

The CRA is a good idea, if done right.

I agree merrie, if you check my clips I've been posting about the grass roots campaign against the bailout, which I have participated in. The markets should be free to fail, the criminals should be prosecuted. The cleansing will reform anyone who participated in overextending themselves, and the uber wealthy wall streeters will send their money to overseas bank accounts. Likewise, the liberal elites will send their charity overseas, and our impoverished will remain stuck, although a larger percentage of the population, thanks to all of this. Hopefully, mccain or obama will do as they promise and reform the lobby, earmark, campaign finance ethical lapses that the system has become. And peo...

I agree merrie, if you check my clips I've been posting about the grass roots campaign against the bailout, which I have participated in. The markets should be free to fail, the criminals should be prosecuted. The cleansing will reform anyone who participated in overextending themselves, and the uber wealthy wall streeters will send their money to overseas bank accounts. Likewise, the liberal elites will send their charity overseas, and our impoverished will remain stuck, although a larger percentage of the population, thanks to all of this. Hopefully, mccain or obama will do as they promise and reform the lobby, earmark, campaign finance ethical lapses that the system has become. And people like us, through the power of the internet will mount more grassroots campaigns, flooding our representatives with the people's voices, and our nation will be better for it.