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Bailouts Necessary and Unnecessary

Megan McArdle captures, more simply and clearly than anyone else has yet done, why it is that support for the Big Bailout does not and should not translate into a bailout of other industries, the auto industry especially:

Why bail out Wall Street and not GM, demand many people.  Why do we care about bankers and not ordinary folks?

I think this misses the point of the financial bailout.  Whether or not it works–and I sure hope it will–I don’t think very many people wanted to bail out the financial industry because we were so moved by the plight of those plucky traders on the mortgage desk.  We bailed them out not because they deserved it–they didn’t–but because if we didn’t, there was a very big risk that they would take us down with them.

This is not generalizeable to other industries.  Money is weird.  Finance is weird.  There is no other industry that is, first, so tightly coupled, and second, severely affects every other industry in the country.  Moreover, there are few other industries that are so vulnerable to panic.  Strategic injections of capital can actually salvage operations that are otherwise sound.

GM’s operations are not otherwise sound.  They have been headed for this moment since 1973…


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