Just this week, the government took over mortgage giants Fannie Mae and Freddie Mac. This put taxpayers explicitly on the hook for their massive liabilities. And earlier this year, the Fed opened the spigot to keep flailing investment houses afloat. There’s a decent argument for these interventions. In each case, quick action might have kept these medium‐sized disasters from snowballing and bringing down the whole economy. If so, the extravagant expense is worth it.
But what if one or all of the Big Three fail? Well, other companies will buy their assets and use them more wisely and profitably. Some people will lose jobs, most will find new ones and the gains in efficiency will make the economic pie larger and job‐growth more likely. Maybe you’ll buy a Toyota Camry. Made in Kentucky. We’ll pull through.
Here’s a paradox for you. Government guarantees often create the very conditions they are meant to guard against. The implicit guarantee behind the privately‐owned yet “government‐sponsored” Fannie Mae and Freddie Mac contributed to the irrational risk‐taking in the mortgage industry that has pushed our economy to the brink. When individuals and firms are made to bear the costs of their own decisions, their decisions will be more carefully made.
Detroit doesn’t need taxpayer subsidized loans. It needs to make better decisions — or else fail. The alternative to creative destruction is not stable prosperity. Propping up yesteryear’s winners leads to stagnation at best, plain old uncreative destruction at worst. The best defense is often no defense. But politicians, who can see no further than the next election, have once again placed our bank accounts in harm’s way.