Reactions to the same article I featured in “Recession” are mixed at the Young Americans for Liberty blog on the same article.

Matt Varvaro argues:

misguided regulation would drive away competent workers to firms who are not dependent on government funds and are not burdened by the many “strings” attached to them, which in turn would harm the taxpayer — liable for these companies’ losses — even more.

Others, such as Bonnie Kristian, argue:

The bust of the boom-bust cycle is supposed to get rid of these sorts of companies, and propping them up longer — even in hopes of regaining some of our tax dollars — will only exacerbate the problem while simultaneously making it look as if the government’s plan has worked.

Which has been my position in that previous post. Basically, Varvaro is arguing that the government is hurting the economy because of the long-term damage the bailout will do to these firms. Kristian is arguing that the government’s policy is wrong not because it’s hurting these firms, but because it’s propping them up (and they need to fail). I think they’re both good arguments, and not necessarily mutually exclusive.

Why the government is forcing healthy firms to take money.

Now, My uncle works at Morgan Stanley in New York, and what he’s told me is that many firms, such as Morgan Stanley, are getting money from the government not because they need it, but because the government is forcing them to take the money.

Why would the government force a Wall Street firm to take money when it’s not necessary? Put yourself in the shoes of the Obama administration. The Obama administration believes it’s not a great idea to let these financial titans fail (yes, I disagree with them, but play along for a while). So one of the answers is, essentially, to give them money.

The problem is that receiving bailouts from the government has the unintended consequence of basically advertising, quite blatantly on the cover of the NYTimes, which firms are failing. According to my uncle, giving money to all the major firms allows the administration to hide, to some extent, which firms are healthy and which firms are not.

This is important because an impression that a bank is unhealthy will quicken its descent into collapse — investment is harder to come by or it may be rated lower by a rating agency, which would cause all sorts of problems. All of these work against the Obama plan to save Wall Street firms from falling.

This is basically the side of the government plan that Kristian is arguing against on the Young Americans for Liberty post — the Obama administration is interfering with the recession that’s supposed to get rid of unhealthy Wall Street firms.

However, forcing healthier firms to take the money creates the problems that Varvaro argues against.

Why there are unintended consequences.

These problems are basically those mentioned in the New York Times article.

When a firm takes money from the government, the government is more likely to be able to reach in and interfere with the practices of that business (eg, executive pay). Some firms, who aren’t in great danger of collapse, know that they know how to run their business better than the government does.

That’s the reason why some firms are simply holding on to the money and waiting for the soonest chance to return it to the government.

The result of this is the exodus of talented Wall Street executives and finance workers that we’ve been seeing lately.

Edit, 10:00 PM: When the government gets involved, things get very hectic and messy at a firm. It gets harder to reward good executives (populist outrage), there’s lots of red tape, etc. It’s not a very fun place to work, and sometimes can be hazardous to one’s career if you worked for a while at a firm that received “bailouts” from the government. So these financiers and execs have some incentive to leave these large firms.

The policy of forcing healthier firms to take money was intended to solve a problem caused by government handouts to unhealthy firms… but ironically, it ended up hurting these healthier firms.

Hopefully this government policy won’t create more unhealthy firms (prompting more bailouts!). It’s a vicious cycle.

Who’s right?

Unfortunately, both. Kristian is right — the government should have no business propping up firms. But Varvaro makes the correct point that by propping up these firms, competent workers are less likely to go there. And unfortunately, the combination of these two statements means that we’re propping up an incompetent firm, and by doing so, are making it more and more incompetent.

You see… it’s a cycle.