First, thank you, Bryan, for your warm welcome. And thank you also to the commenters. Before I get to my first topic, I want to appreciate Bryan back. I’m a big fan of his work. My favorite is his piece in which he uses economic analysis to challenge, as Thomas Szasz did over a generation ago, the idea that there’s such a thing as mental illness. I hasten to add that he has not totally convinced me, but he has absolutely convinced me that many of the alleged cases of mental illness are simply cases in which the person at issue has different values or goals from those who claim that he’s mentally ill. My second-favorite is Bryan’s book, The Myth of the Rational Voter. My third-favorite is his article on Communism for my Concise Encyclopedia of Economics.

Second, I want to acknowledge Arnold Kling. I have not met him but I became a fan of his work and his mind after reading many of his articles on and, especially, his blogs for about the last six weeks on the financial “crisis.” Many of his insights have helped me in my interviews on various radio shows, including the BBC and KQED-FM, the NPR station in San Francisco. Arnold also has an excellent article on International Trade in my Encyclopedia.

Finally, thanks to Lauren Landsburg, the webmaster for this site, for her passion and care in overseeing this site and for her tutorial yesterday on how to do it.

Now to my first blog. A fellow blogger and a colleague of Bryan’s, Don Boudreaux, had a link to my article on the financial crisis last week. One of the commenters stated:

My point was mainly that most of the people with strong libertarian positions on the crisis, also, happened to be people that weren’t macroeconomists. Whereas, macroeconomists with libertarian leanings tend to be more cautiously positioned or for the bailout. I offered Tyler Cowen as an example, but if I’m allowed to extend beyond GMU libertarian, I could add Mankiw, Feldstein, Taylor, Cochrane, and probably with a bit of research many more.

This commenter, Charlie, makes a good point. I am not a macroeconomist or, more exactly, the macroeconomics I learned in graduate school and still know pretty well is somewhat dated. And certainy I would understand the issue better if I were a practising macroeconomist. But here’s where Charlie goes wrong. I don’t need to be a macroeconomist to analyze a microeconomic issue. And the microeconomic issue in the bailout is this: Does the government do a good job of central economic planning? That was first answered in 1920 by Ludwig von Mises, who pointed out that central planners could not have the information necessary to do their job well. Friedrich Hayek honed the argument in a series of essays in the 1930s and 1940s. His best was his 1945 article, “The Use of Knowledge in Society.” In his 1944 book, The Road to Serfdom, Hayek also did an early Public Choice analysis: he showed that the central planners would have perverse incentives.

Many followers of the bailout, even many astute ones with a solid understanding of macroeconomics, see the bailout and how it is conducted as being a choice of a strategy in a very complex world where the conductor of the bailout does not have much information and could easily blow it. Sound familiar? This is precisely the problem of central planning. In the case of the bailout, the central planning is of financial markets. Unfortunately, many of these same people have undue sympathy for Paulson and Bernanke. I conclude, instead, that central planning doesn’t work and that Bernanke, a macroeconomist who also should know some micro, should have seen this.

During the height of Communism, economists who were critical of Communism told true stories about the inevitable distortions caused by central planning and quotas in place of free markets. One of the standard stories was of the nail factory that, when it was assigned a quota for the number of nails, produced tacks and, when it was given assigned a quota for tonnage of nails, produced large nails. We might laugh at these stories but the consequences for the average Soviet citizen were tragic. How does this apply to the current bailout?

Consider these three paragraphs from a recent article in the Wall Street Journal by Liz Rappaport and Serena Ng:

Barely two days after the Treasury announced plans to buy stakes in U.S. banks and the Federal Deposit Insurance Corp. said it would provide full guarantees on bank debt for three years, investors already are making unexpected shifts.

Wednesday, bonds issued by mortgage providers Fannie Mae and Freddie Mac sold off sharply, even though these companies have government backing behind their debt. Traders said hedge funds were forced to sell as they deleverage, and investors were selling some Fannie and Freddie bonds — known as agency debt — and shifting money into bonds issued by large U.S. banks. These bank bonds boast higher yields and now also benefit from implied government guarantees, making them appear relatively safe in the eyes of risk-averse investors, for now.

While Treasurys remain popular now, because of a flight-to-quality trend that feeds off their safety, another unintended impact may be in the wings. The bailout plans will result in massive new issuance of U.S. Treasurys, sold to pay for it all. This likely would dilute the Treasury bond market, drive down prices, push up yields and cause mortgage rates to rise.

Welcome to the the problems of central planning.