http://volokh.com/archives/archive_2008_09_21-2008_09_27.shtml#1222184010
Let's assume there is a small chance that, absent a bailout, there
will be a "catastrophic outcome" of the sort Eric describes. That
possibility is not by itself sufficient to justify the bailout. One
also has to consider the risks of the bailout itself. Some of these are
highly likely to happen, such as hundreds of billions of dollars of
expenses borne by taxpayers, the creation of moral hazard for
industries who will expect to be bailed out in the future, and the
economic inefficiency caused by government control of a large part of
the economy. In addition, there is a small but probably nonzero risk
that the bailout itself might lead to a "catastrophic outcome" thatt
goes beyond the onerous costs described above.
For example, despite the two year sunset provision in the draft
legislation, that legislation might end up getting extended, leading to
permanent government control of the finance industry, and an eventual
monopolization of finance by government; a future administration could
claim that the government cannot manage its massive portfolio of
finance firms efficiently unless it has a monopoly of lending, and
future, economically illiterate public opinion, might buy the claim.
That in turn might lead to a severe permanent decline in our standard
of living, as we spiral into quasi-socialism. By transferring enormous
resources from successful businesses to failing ones, the bailout could
also damage the economy enough to cause a deep recession, which in turn
could lead to "predictable bursts of xenophobia, beggar-thy-neighbor
policies, global political instability, and all the rest."
I don't consider these scenarios to be likely. But if we are going
to justify the bailout by weighing low-probability catastrophic risks,
we have to consider both sides of the equation. We can't defend the
bailout by claiming that it might stop a low-probability catastrophic
event without considering the possibility that it might itself become
the cause of such a catastrophe.
There are low-probability catastrophic risks on both sides. When you
consider the fact that the bailout also has severe non-catastrophic
costs that have a very high probability of occurring, the case for it
still hasn't been made.
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