The bailout bewilderment

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions' liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.

That is from economists Luc Laevan and Fabian Valencia who have a working paper on banking crises [pdf] out for the International Monetary Fund, covering 42 meltdowns in 37 countries since 1970. (via Reason).

It is so bizarre that there is some serious disconnect between economists and politicians. Actually, there seems to be extensive differences:

• among economists
• between economists and politicians
• among politicians
• among Democrats
• among Republicans

When such a level of difference exists, my read of the Ockham's Razor is that we have no clue about the problem, and even lesser an understanding of the solution. In that case, is it really wise to jump into a 700 billion dollar commitment after a measly couple of days of debates and discussions?

As always, The Daily Show explains everything very well :-)