By Arnold Kling
Mark Thoma has a roundup of commentary on the Citigroup bailout. I’ll add a few thoughts.
1. For all of the Depression Mania, there is a lot of the U.S. economy that does not have to shrink. Manufacturing is pretty lean to begin with. Housing construction is already much lower than it has been in years. Unlike the 1930’s, we have some very big sectors (health care, education, other government employment) that are unlikely to develop massive layoffs.
The one sector that definitely needs to contract is the financial sector. Maintaining Citi as a zombie bank is not really constructive. I would feel better if it were carved up, with the viable pieces sold to other firms and the remainder wound down by government. In my view, getting the financial sector down to the right size ought to be done sooner, rather than later.
From my perspective, the whole TARP/bailout concept is misconceived. The priority should not be saving firms. The priority should be pruning the industry. Get rid of the weak firms, and make good on deposit insurance. Then let the remaining firms provide the lending that the economy needs.
2. When I see Obama’s proposals for a big investment in infrastructure, I get this picture in my head of former mortgage brokers and bond salesmen on highway construction projects wearing hard hats and driving bulldozers. Actually, the employment benefit of infrastructure projects is more likely to go to the illegal immigrants who were laid off from housing construction and who otherwise would be headed back home.