What If the Bank Bailouts Never Happened?

Julian Sanchez raises an interesting objection to the thesis offered by Tyler than me: that for libertarians, absent the bailout, we would have gotten something even worse.

This sounds an awful lot like the old debate trick I've previously referred to as the fiat shuffle.
Just to refresh: The way the trick works is that, for the purposes of arguing the merits of a given policy, you assume away various real-world political barriers to the policy's being enacted--in debate lingo, you get to "fiat" the policy and restrict the argument to whether this would be a good thing without fussing over whether you could get the votes in the House (or whatever) to do it. The shuffle comes when you assume the same political constraints back in again as part of an argument that the proposed policy would create pressure for other salutary reforms, or to dismiss alternatives as infeasible.

Now, this isn't a clear case of fiat shuffle, because it's easy to imagine that we might have had the political will to resist the bailouts, but that this would not have been sufficient to forestall still more aggressive intervention later assuming things would have gotten far worse. Still, despite a an initial defeat in the house, the bailout ultimately passed by a 3-to-2 margin there, and by an even more lopsided 3-to-1 vote in the Senate. Which is to say, the world in which we didn't do the bailout is clearly a world with a pretty radically different political culture, presumably populated by legislators with a very different average worldview. When would the inhabitants of that world have given up their resistance to intervention, and how much more dramatic would the intervention have been when they did? Damned if I know, but projections based on the current composition and views of Congress probably don't apply.

I'm not totally sure that's true. If so many conservative and libertarian pundits hadn't caved, I can imagine a world in which the Republicans continued their intransigence, and the Democrats (for understandable political reasons) refused to pass it without them.

But leaving this aside, we actually have some empirical evidence here. In 1929, the federal government and the federal reserve took little action to bail out the banks. In 1932, we elected FDR.

That was a long time ago. But when you look at modern financial crises from Iceland to Argentina, what you see is that they have a tendency to produce some, well, radical changes in the political culture. Moreover, those trends usually tend towards populism, redistribution, and state control of substantial segments of the economy. So if we hadn't had our Pelosis now, we'd have had them by 2012. To a first approximation, I'd say that the bailouts are the reason that we won't have a single-payer health system or actual national automakers any time soon.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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