In my opinion, after the recent massive financial bailouts and other interventionist federal actions (and in some cases nationalizations) within our economy (i.e. the private sector), several pressing questions remain unanswered. I have been pondering on five of them for some time now. These are listed below in no apparent order.

1. If bad loans got us into this situation, then why is there so much effort to get banks to loan even more money?

If there is a dollar to be made and people are free to act in rational ways, then somebody creative will find a way to earn that dollar. My thinking is that in spite of the negative news regarding financial markets right now, there remains a market for loaning money to people with good credit. If this is the case, then there must be people willing to make a profit in such a market and so they will loan money to those with the means to pay them back. No crisis there.

On the other hand, the market for people with bad credit (i.e. people who you shouldn’t loan money to) has dried up and rightfully so. That should be a good thing. It made no sense to make risky loans but such actions were encouraged by foolish government policy that distorted reality and created an artificial market for bad loans. No loans to people who should not get loans means no crisis there either.

So let’s fast forward to now. I want to know why there is all the fuss about banks not loaning money then? It’s good banks are not making more bad loans. To push them to loan on a large scale again seems to me to further push us into the mud. We’re supposed to be getting ourselves “unstuck” but loaning more would seem to do just the opposite and compound our already bad situation. That doesn’t make a bit of sense.

2. Bailouts rewards bad performance.

Corporate leaders are paid to lead. Part of leading means avoiding problems. It seems to me that we have a bunch of bad leaders at many financial institutions (and in government) since they led their companies (and federal policy) on a path of suicide. Why should the government reward these guys with a bailout? Seems to me that such actions simply reward their poor judgment and punish those who kept their companies out of trouble.

As for the auto industry in particular, I have some specific thoughts along these lines. They were on an unsustainable path by operating at a loss and piling up debt for so long. Instead of cutting back, rethinking, retooling, living within their means and building products that customers want (and will turn a profit), they were unwilling to change. A bailout will just put off the invevitable and reward their past negatives. Where is the incentive to adjust to market forces and make an honest profit by pleasing customers like all other businesses have to do? Furthermore, a bailout invites the government to meddle within an essential American industry. That’s an incredibly dangerous proposition.

3. Bankruptcy and subsequent restructuring allows serious change to occur quickly.

Bankruptcy can give a company temporary relief while forcing hard decisions to be made and implemented under court order. In some cases, ownership changes as assets are sold or even repossessed. Physical assets, however, don’t disappear just because ownership changes. In most cases of high profile companies, ownership changes don’t kill the company. Just because ownership or the company name changes doesn’t mean the demand for that type of product ends. Good news! That means, then, there is still a market for those products.

Think again of the American auto industry. If General Motors were to go bankrupt, the demand for vehicles would not cease. Somebody would still build cars in most of those General Motors factories. The other companies could not step in overnight and build enough cars, trucks and parts to meet consumer demand. That means there is still a huge market for, and thus incentive, to keep General Motors alive.

If left alone, I predict that instead of collapse, bankruptcy and much-needed restructuring would occur within the American auto industry. The result would be an industry that is much stronger and more competitive for the future after undergoing the tough decisions needed now.

4. We’re on a slippery slope to socialism and nationalization (i.e. communism).

I alluded to this thought above. I don’t like the federal government taking taxpayer money (or borrowing money that taxpayers will have to repay) and “buying” or assuming ownership of private companies or even parts of them. I see no Constitutional authority for such a move and it is highly contrary to the tenets of capitalism.

This economic downturn is not a problem with capitalism. Instead, it is a problem caused by government interference that distorted free markets by preventing them from properly regulating themselves and rooting out bad loans and risky behavior. In short, government created this problem and now we’re asking government to fix it? How foolish is that?

5. Finally, why have certain leaders not been fired for their incompetence?

We have a Treasury Secretary that serves at the will and pleasure of the President. There are leaders in Congress that oversee financial committees and other influential boards and administrative bodies. Corporations and banks have leaders. Surely these leaders should have seen this problem coming years ago. After all, they are paid to prevent problems such as this.

The very fact that so many of our leaders, from the Treasury Secretary down to corporate executives, either didn’t see the problems or failed to warn of them makes these individuals part of the problem. Instead, and making the case even worse, it seems many of these leaders contributed greatly to the problem. That scenario suggests they are guilty of inept leadership. Simply put, they are incompetent.

In short, those incompetent individuals who contributed to this problem should be fired and replaced with competent individuals who will work to get their companies and our country out of debt and on a solid financial footing. I’m troubled that I can think of nobody who has been fired for their part in creating this problem. Instead, they are awarded billions to spend and authorized with questionable powers to “fix” what they either helped create or failed to avert. That response seems about as reasonable as giving gas and matches to an arsonist.

So, in conclusion, these five ponderings have occupied a great deal of my thought (and frustration) over the past few months. Please share your ponderings below.

Jeffrey A. Miron is a senior lecturer in economics at Harvard University. He is a Libertarian and was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan. His commentary, entitled Bankruptcy, Not Bailout, is the Right Answer, was published today at CNN.com and the American Future Fund, an organization that advocates conservative, free market ideals.

The latest bailout plan that was voted down yesterday would have authorized $700 billion for the U.S. Treasury to purchase “troubled assets” from Wall Street financial institutions. Miron argues that this bailout proposal was a “terrible idea” and explains why. First, however, he explains how we got ourselves into this mess.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

After pinning the blame squarely on failed government policy, Miron correctly reasons that it is unwise to let government do more of the same in the name of recovery.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

Miron then builds a case for allowing financial institutions to declare bankruptcy which would mean their creditors would own the remaining assets.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

He argues that bankrupcy is superior to a government bailout because it punishes foolishness and protects taxpayers.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.

Miron admits that this process would be ugly and could make the credit situation worse before we would see improvement. However, he argues that “talk of Armageddon” is “ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.”

Miron also suggests that the current credit freeze conditions we’re seeing is “likely due to Wall Street’s hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.” I agree that good market-based alternatives are probably being overlooked in the hopes of a more favorable (in the short run, at least) government rescue.

So that’s the problem. Now for the solution. What should government do? Miron writes:

Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

Miron concludes that someone will have to pay for these mistakes but it does not have to be the U.S. taxpayer. I couldn’t agree more.

I don’t trust the government to fix this mess when their non-market-based policies were what created the problem. Undoubtedly any bailout plan would be filled with unnecessary spending and loaded with benefits for special interests. No big government, no bailout!

Think about this with me for a minute if you would. The government is asking us taxpayers to hand over $700 billion more dollars on top of the $2+ trillion we already give them (or they obligate us with in the form of debt). That’s an enormous amount of money.

Today there is an Associated Press article that looks at what just how big $700 billion is compared to other spending. I quote some of the article below:

You could buy yourself a war with that kind of money – the U.S. has spent $648 billion on Iraq war operations so far.

You could match Franklin Roosevelt on his New Deal and raise him billions more.

Even in a town where billions come and go without anyone blinking, the money that could go into the Wall Street rescue is eye-popping. The House on Monday voted down a proposed $700 billion bailout package, but congressional leaders said they were committed to trying again.

What else could the government do with a $700 billion blank check? There are, well, billions of possibilities.

It could ensure universal health care coverage for six years, for example, or upgrade the country’s most deficient bridges four times over. All the work to upgrade coastal levees that’s been done since Hurricane Katrina? It’s a mere drop in the proverbial $700 billion bucket – $7 billion, or just 1 percent. You could build 1,750 bridges to nowhere.

Or run an entire country. Seven hundred billion dollars is more than twice the size of the economy of Denmark, which had a gross domestic product of $312 billion in 2007.

Seven hundred billion dollars would buy 70 Hubble-type space telescopes. Or about seven international space stations. It would finance the National Institutes of Health, the nation’s premier medical research institute, for two decades. Or pay the U.S. national intelligence budget for 15 years.

According to the Wall Street Journal, half the money FDR spent on his New Deal program to lift the country out of the Depression and banking crisis was for public works projects. For $250 billion in today’s dollars, the nation got 8,000 parks, 40,000 public buildings and 72,000 schools.

The article provides even more examples but I think you get the picture. My question for the government is simple: You created this problem so why should I trust you to fix it with more government?