Tucker quotes Schumer as saying “When there is a crisis in confidence of credit, you need the federal government to do things to re-assure people that things will get better”. In this case, Schumer is mostly right. The root cause of the current financial crisis was a short-term change in asset values that led to a lack of confidence in the quality of the assets backing credit issuers, and a short term reaction to the long-term projections of the short-term problems. Reestablishing confidence in the credit system would indeed lessen the severity of the crisis in the short-term while the long-term problems would likely resolve themselves in time.

Tucker responds “But history should warn us that when the federal government gets involved, things usually get worse”. Tucker has reversed cause with effect. He should have said “But history should warn us that the federal government gets involved when things get worse”. In fact, history teaches us that with or without government intervention, things get better or worse, but that governments are most likely to intervene in intolerable situations rooted in causes prior to the intervention. I would like to add that never in modern history has a major nation had a government that never intervened in its economy, if for no other reason than setting and maintaining the rules of orderly commerce is one of the major functions of government. And since time is monotonic we never really do get a chance to try both intervention and non-intervention for any particular economic situation to find out which would really be better. Thus any blanket conclusions about the success or failure of intervention compared to non-intervention is faith based and such claims are just (scientifically) unjustifiable opinions.

Yes, government interventions may be associated with unintended consequences (the list is quite long), but so are government failures to intervene. And in many cases of government interventions, the benefits of the interventions (compared to the projected non-intervention results) greatly outweigh the unintended consequences.

The problem with proposals like a 5-year freeze on adjustable mortgage rates is not that it is a government intervention, but that it is a bad intervention. However, the value to the loaner of an affordable fixed rate mortgage is much higher than a defaulting variable rate mortgage at a much higher interest rate. I imagine there are actions the government might take to get otherwise solvent lenders to recognize the loss on their defaulting variable rate mortgages, refinance then with affordable fixed rate mortgages, and in exchange, provide some government assurance that short term credit crunch resulting from the losses on the defaulting variable rate mortgages would be covered for a fixed length of time with short term government loans.

There is nothing wrong with providing $5 billion to help troubled homeowners, provided that the help is limited to where it can make an effective contribution to stabilizing the run on mortgage debt and avoids rewarding those whose reckless behavior caused the financial crisis in the first place, such as by explicitly not covering liar-loans, real estate speculation loans, etc.

Tucker says “One reason gas prices are so high is that oil is priced in dollars, so as the greenback loses value, oil becomes more expensive. In the long run, high gas prices will harm the economy by driving up the cost of just about everything”. Tucker again has things backwards. Our dollars are weak because we import oil and use it inefficiently, earning us less return on our use of oil than we pay for it, and thus have a huge negative trade balance. Since the demand/price curve is super-linear, as oil becomes more expensive we will presumably increase our oil use efficiency and actually improve out balance of payment situation, thus increasing the strength of the dollar.