Dan Mitchell of the Cato Institute has an article at NRO that makes many of the same points I’ve made here:
The proposed bailout of the financial system is a misguided scheme that will hurt the U.S. economy in the short run and long run. The economy currently is stumbling as a consequence of a government-created housing bubble, but a bailout of companies, executives, and shareholders that made unwise decisions would, at best, extend the economy’s adjustment process. More likely, the bailout would impose considerable additional economic damage because political factors would at least partially supplant market forces in determining the allocation of resources.
Some politicians and government officials are making reckless charges of greater financial turmoil in the absence of a bailout. These grossly irresponsible statements may cause short-term market losses as investors try to second-guess how other investors will respond, but the assertion that the stock market’s health — especially in the long run — depends on bigger government is belied by real-world evidence. Japanese politicians made many of the same mistakes in the 1990s that American politicians today are considering, and the Nikkei suffered a lengthy period of decline — and remains today far below its peak level.