Call it what you want: a bailout, a thumb on the scales, bidder restrictions–the FCC might conspicuously intervene in the 2015 incentive auctions at the behest of smaller carriers and public interest advocates.

Chairman Wheeler’s recent comments indicate the FCC may devise a way to prevent the largest two carriers–AT&T and Verizon–from purchasing “too much” of the television broadcasters’ spectrum at auction. AT&T likely sees the writing on the wall and argues that if there are auction limits, the restrictions should apply only to the auction, rather than more extreme restrictions that would penalize AT&T and Verizon, the largest carriers, for previously-acquired spectrum. As The Switch’s Brian Fung put it,

the small carriers favor what are called “asymmetric” spectrum caps that affect various carriers differently, while opponents prefer “symmetric” caps that don’t account for existing market positions.

While I wish AT&T put up more of a fight to auction interventions, they (and staff at the FCC) are handicapped in pursuing an unrestricted auction. The blame lies mostly with Congress who gave the FCC vague (thus ripe for abuse) and conflicting mandates spanning decades. The 1993 law authorizing auctions, for instance, requires the FCC to “avoid[] excessive concentration of licenses” and to “disseminat[e] licenses among a wide variety of applicants” among other regulatory carve-outs for smaller competitors. These latter requirements, if implemented as rigorously as smaller carriers would like, directly undermine the purpose of the 2012 American Taxpayer Relief Act that requires the upcoming spectrum auctions raise $7 billion for a public safety broadband network and $20 billion for deficit reduction.

By asymmetrically penalizing AT&T and Verizon, the FCC increases the probability the auction fails to raise the tens of billions of dollars needed (see Fred Campbell’s recent paper). I haven’t heard a policymaker speak about the incentive auction without remarking how extraordinarily complex it is. That complexity–as was made clear in this week’s Senate hearing on the subject–means no one knows how much spectrum will be auctioned off or how much money will be raised. I was doubtful the FCC would secure the called-for 120 MHz for auction in the first place, but the Senate hearing convinced me that they might not get even 60 MHz. If the FCC meddles too much and the broadcasters aren’t assured they’ll get top dollar for their spectrum, the broadcasters might not show up to sell.

For many reasons, the FCC should ignore the pressures to restrict the large carriers in bidding. Smaller carriers argue the large carriers will outbid them only to preclude competition and hoard the spectrum. Every major carrier is spending billions to expand its footprint and capacity rapidly so the hoarding argument is hard to accept (not to mention, carriers face FCC build out requirements). The hoarding argument also confounds me because AT&T and Verizon are at the forefront arguing for more spectrum auctions, particularly spectrum from federal agencies. Would they want the market flooded with new spectrum only so they could spend billions to hoard it?

Asymmetric auction restrictions also resemble a bailout for smaller carriers. T-Mobile and Sprint–who most actively lobby for auction restrictions–are not mom-and-pop establishments. Each is a sophisticated, powerful corporation with access to capital markets and backed by larger international telecoms–Germany’s Deutsche Telekom for T-Mobile and Japan’s SoftBank for Sprint. DT and SoftBank have both pledged to spend billions in the next few years to improve their American carrier’s competitive position. Such carriers do not need an FCC handout.

The bailout resemblance is more apparent when you realize Sprint has been hamstrung for nearly a decade with damaging business decisions. Three come immediately to mind: 1) the dreadful merger with Nextel in 2005; 2) the ill-fated bet in 2008 to forgo LTE rollout in favor of WiMax, a competing 4G standard; and 3) the loss of over one million customers when it discontinued its push-to-talk iDEN service for network upgrades. The losses from the Nextel merger alone approach $30 billion.

To be clear, I don’t second-guess Sprint’s decisions. They did what innovative firms are supposed to do in attempting big, risky investments. However, it should not be the job of the FCC to favor some firms through spectrum auctions because some carriers’ business decisions did not pan out. That is not a competitive wireless auction–that is an FCC-orchestrated bailout. Granted, the FCC has been handed conflicting mandates. The Commission has ample discretion, however, to conduct a competitive auction that both complies with the law and improves chances of reaching the ambitious revenue goals. Intense meddling with auction results could prove disastrous.

The Mercatus Center at George Mason University has just released a new paper by Brent Skorup and me entitled, “A History of Cronyism and Capture in the Information Technology Sector.” In this 73-page working paper, which we hope to place in a law review or political science journal shortly, we document the evolution of government-granted privileges, or “cronyism,” in the information and communications technology marketplace and in the media-producing sectors. Specifically, we offer detailed histories of rent-seeking and regulatory capture in: the early history of the telephony and spectrum licensing in the United States; local cable TV franchising; the universal service system; the digital TV transition in the 1990s; and modern video marketplace regulation (i.e., must-carry and retransmission consent rules, among others.

Our paper also shows how cronyism is slowly creeping into new high-technology sectors.We document how Internet companies and other high-tech giants are among the fastest-growing lobbying shops in Washington these days. According to the Center for Responsive Politics, lobbying spending by information technology sectors has almost doubled since the turn of the century, from roughly $200 million in 2000 to $390 million in 2012.  The computing and Internet sector has been responsible for most of that growth in recent years. Worse yet, we document how many of these high-tech firms are increasingly seeking and receiving government favors, mostly in the form of targeted tax breaks or incentives.

We argue that the creeping cronyism could have two major negative ramifications. First, it could dull entrepreneurialism and competition in this highly innovative sector since time and resources spent on influencing politicians and capturing regulators cannot be spent competing and innovating in the marketplace. Cronyism will also negatively impact consumer welfare by denying consumers more and better products and services. Additionally, consumers might end up paying higher prices or higher taxes due to government privileges for industry.

Second, cronyism also raises the specter of greater government control of the Internet and of the digital economy. When policymakers dispense favors, they usually expect something in return. They also become accustomed to having greater informal powers over the sector receiving favors, and contribute to DC’s infamous “revolving door” problem.

High-tech America’s recent embrace of Washington could take it down the familiar path followed by the agriculture, telecommunications, and automotive sectors (among many others), with government becoming both protector and punisher of industry. Today’s dynamic tech industries will increasingly come under the “Mother, may I?” permission-based regulatory regime that encumbered the older information technology sectors.

Finally, this paper offers strategies for stalling and diminishing the cronyism already taking root in the high-tech sector. We suggest several targeted reforms to limit or undo cronyism. Generally speaking, however, we note that, as economist David R. Henderson argued in an earlier Mercatus Center report, “There is only one way to end, or at least to reduce, the amount of cronyism, and that is to reduce government power.”

The paper can be downloaded from the Mercatus website, SSRN, or Scribd. The Scribd version is embedded down below. (Also, here’s some coverage of the paper over at the Washington Post’s “Wonkblog” from our old colleague Tim Lee. Here’s more coverage from Bloomberg Businessweek and the San Francisco Chronicle. And here’s a U.S. News oped that Brent and I wrote condensing our paper into just 600 words. Finally, a short 3-minute video of me discussing the problem of tech cronyism is also embedded below.)

A History of Cronyism and Capture in the Information Technology Sector [Thierer and Skorup – July 2013] by Adam Thierer

PFF today released the fifth installment in our ongoing series on “The Wrong Way to Reinvent Media.” This series of papers explores various tax and regulatory proposals that would have government play an expanded role in supporting the press, journalism, or other media content. In the latest essay, Berin Szoka, Ken Ferree, and I discuss proposals for direct subsidies for failing media outlets and out-of-work journalists.

We argue taxpayer support for failing outlets and unemployed journalists implicates significant First Amendment concerns. On the whole, subsidies can make “journalists and media operators more dependent upon the State; compromise press independence and diminish public trust in the free press; and result in government discrimination in the politically inescapable dilemma of determining eligibility for subsidies.” Such an agenda would also entail huge cost to taxpayers—initially about $35 billion per year according to advocates—and would represent “a massive wealth transfer from one class of speakers to another…”

We warn that calls for seemingly beneficent bailouts “to save” the media and journalism may actually be driven by those who have something more nefarious in mind: a “post-corporate” world shorn of media capitalists, and “such radicalism must be rejected if we hope to sustain a truly free press and uphold America’s proud tradition of keeping a high and tight wall of separation between Press and State.”

The ideas within these and other essays in the series will be worked into a major PFF filing in the Federal Communications Commission’s (FCC) proceeding on the “Future of Media” on May 7. The paper may be viewed online here and I’ve attached it down below in a Scribd reader.

Wrong Way to Reinvent Media Part 5 – Media Bailouts [Thierer Szoka Ferree – PFF] http://d1.scribdassets.com/ScribdViewer.swf

Our readers may be interested in this excellent WSJ article, Too Risky for Venture Capitalists: Why proposals for a government bailout were roundly rejected.  We should all take heart in the the fact that the venture capital community itself resoundingly opposed the notion of accepting a massive infusion of taxpayer money, especially Tom Friedman’s suggestion:

“You want to spend $20 billion of taxpayer money creating jobs?” Mr. Friedman wrote. “Fine. Call up the top 20 venture capital firms in America” and invest the money with them.

But I see three more reasons why those interested in technology policy should pay attention to this encouraging episode.

First, the groundswell of opposition seems to have been driven largely by the Internet, both as a vehicle for disseminating the bailout proposals and for voicing opposition to them:

Venture capitalists certainly agree that innovators and start-up companies, not bailed-out GMs or Chryslers, will create the new jobs. They rightly brag that almost 20% of U.S. gross domestic product is generated by companies built by venture capital, such as Intel, Apple and Google. Still, they almost universally panned the notion of taxpayer support. Their real-time rejection is an excellent example of how social media — here, the venture community dissecting a proposal online — can now quickly take down bad ideas.

Second, it should almost go without saying that venture capital is the fountainhead of innovation, especially the disruptive innovation that is constantly pushing the envelope of technology policy.  A healthy VC sector is the bedrock of a dynamic, free and innovative economy.  The VCs realize that this requires, more than anything else, avoiding the market distortions caused by government funding:

“The top venture firms don’t want, don’t need and are never going to take government money. The same is true of the top entrepreneurs,” Fred Wilson of New York’s Union Square Ventures wrote on his blog. “The worst firms, on the other hand, will gladly accept government money,” which would go to investors who can’t raise funds privately and to entrepreneurs whose ideas shouldn’t be funded. “It’s a problem of adverse selection….” The idea of direct government funding is also anathema because it would undermine market discipline. Pension funds, endowments and other institutional investors keep a close eye on how their invested money is doing. Venture firms can raise new funds only if their previous performance was good. Several venture capitalists pointed out the irony that government-funded venture capital could mean trading a credit bubble for another technology bubble. Artificially inflating the venture coffers through a government fund could risk repeating the debacle of 1999-2000, when too much money chased too few good ideas, resulting in the sharp deflation of the Internet bubble. 

Third, the VC community’s response should serve as a lesson for other industries, but particularly high-tech industries, about how the government subsidies they find attractive today in a time of intense pressure on their bottom lines could ultimately harm them.  Instead of jumping on bailout bandwagon, perhaps these industries ought to focus their lobbying efforts on some of the eminently sensible suggestions coming from the VC community, such as the following:

If policy makers want to help entrepreneurs and their investors, there’s no mystery about what’s needed. Immigration needs to be reopened. Venture capital is still available, but the U.S. is now a laggard in the other half of the equation, which is making sure the entrepreneur’s sweat, energy and risk-taking can ultimately pay off. Sarbanes-Oxley helped kill the market for public offerings, which had been a lucrative step for successful start-ups. Income taxes are going up, not down. And the U.S. capital gains tax rate of 15% contrasts with the 0% rate in Hong Kong, Singapore and even Germany, where there’s an understanding that these investments are made with income that’s already been taxed once.

I’ve warned about the dangers of subsidies to the high-tech industry, but I do recognize that the unintended consequences of  subsidizing technological innovation may far outstrip those of subsidizing technological infrastructure, which is what the Obama administration seems to be focused on.  Indeed, if one is going to spend taxpayer money on any subsidies in the name of “stimulus,” it’s difficult to think of a better way to spend that money than on promoting broadband deployment and adoption (however much of a myth it is that we are lagging behind the rest of the world in these areas).  

Still, no matter how worthy the objective, all subsidies distort markets. Few do as much damage as those showered on industries particularly based on risk—e.g., venture capital and financial markets.  But whatever these distortions, the Golden Rule still applies: he who has the gold, makes the rules!  With government subsidies, come government controls.

See my comparison of the state of technology in 2008 versus 1992, during the last Democratic presidential transition.

In mid-2008, the four-gigabyte (or 4,096 megabytes) flash memory chip in an iPod Nano cost $25. Late in 2008, four-gigabyte flash cards and USB drives are selling for $14.99. But back in 1992, four gigabytes of flash memory would have cost $500,000. This means a hypothetical iPod Nano circa 1992 would have set back the teenage Nirvana or Boyz II Men fan around $3 million. Apart from research scientists and a few early adopters of Compuserve and AOL, the Internet essentially didn’t exist in 1992. Monthly Internet traffic was four terabytes. All the data traversing the global net in 1992 totaled 48 terabytes. Today, YouTube alone streams 48 terabytes of data every 21 seconds. . . . The dramatic centralization of money, power, information and influence now under way seriously threatens the entrepreneurial revelations and technological revolutions that drive long-term growth. If we quasi-nationalize the energy, finance, auto and health care markets, and possibly bar dynamic new business models on the Internet, as with possible network neutrality regulation, we will close off many of the most promising paths to needed efficiencies and, more important, new wealth.

See the whole article at Forbes.com: “How Techno-Creativity Will Save Us.”

I’m fond of quoting Diane Mermigas, editor-at-large at MediaPost, who is one of the finest media market watchers in the journalism business today. Her latest MediaPost column offers another sobering look at the radical changing sweeping through the media marketplace today. In that article, she notes that even though we are in an era of Big Government bailouts for financial institutions and (possibly) auto makers, old media operators will be left to to fend for themselves, and many will likely die off as a result:

What we do know is there will be no federally funded bail for media, Internet, entertainment and advertising. Big media by definition is not nimble and innovative enough to simply dump what’s not working, modify what can be saved, and grow what works. There isn’t much that big media companies can bank on or reliably forecast moving into 2009. They are hamstrung between deteriorating traditional costs and revenues and evolving digital business models that do not offset the losses, generating less than 10% of their overall incomes. Big media isn’t just being ravaged by recession; it is being sacked by a technological transformation of enormous proportions.

I discussed a lot of the forces behind the current media meltdown in my recent PFF special report, “Media Metrics: The True State of America’s Marketplace.” As I noted there, this Schumpeterian “creative destruction” we are witnessing today is a normal (but gut-wrenching) part of any major technological transformation, and it need not be addressed with government subsides or interference. However, the problem for many traditional media providers is, as I noted in my special report:

there’s a lot of regulating still going on as well. America’s media marketplace remains subject to a wide variety of regulations… These regulations limit the ability of media operators to respond to the rapidly changing market environment. If all market players were equally hobbled by regulation, perhaps this issue would be less problematic. But these rules are applied in a remarkably arbitrary fashion, with some sectors and firms (over-the-air broadcasters, in particular) being singled out for harsher regulatory treatment than others.

Some will say, “Just let ’em die. We don’t need those old media providers anyway.” If that’s your position, so be it, but I would hope that others (especially public policymakers) would understand the radical unfairness of not giving those players a fighting chance at survival by eliminating the archaic regulations that bind their hands as the seek to reinvent themselves.

[For additional discussion, see my essay from earlier this week, “Remember Newspapers?”]

From the WashingtonWatch.com blog:

Just two weeks after the passage of the bailout bill, and one day after a Treasury Department official declared, “we are committed to transparency and oversight in all aspects of the program,” the Treasury Department began covering up the amount it would pay to New York Mellon Bank to act as a financial agent in the bailout.

Spending $700,000,000,000.00 in taxpayer money is not business as usual. And hiding the terms of government contracts shouldn’t be business as usual anyway.

Friend of TLF and chief political correspondent for CNET Declan McCullagh has a new column on CBSNews.com called “Other People’s Money.”

Nice name, but we’ll have to see whether his status as a fully decorated part of the mainstream media draws him from principled writing to constant applause for self-appointed experts who want to spend our taxed-away dollars for us.

His freshman effort looks pretty good. “Will U.S. Taxpayers Need a Bailout?” points out the perils of politically directed investments in the banking sector.

Members of Congress whose votes changed, allowing the financial services bailout bill to pass.

The New York Times, that dinosaur of old media, is currently live-blogging the most important Congressional debate since that epochal, thoughtful discussion back in October 2002 as to whether Iraq posed a clear and present danger to the United States justifying a declaration of war—I mean, total non-debate that preceded Congress’s decision to issue President a blank checkthat has proved nearly as expensive as the blank check currently before the Congress.

The highlight of the debate thus far:

11:39 a.m. | No socialism!: After Jeb Hensarling, a Republican representative from Texas, affirmed that he was voting against the bill because it smacks of socialism and might represent limits on liberty, Barney Frank, a Democratic representative from Massachusetts, said that he is “ever mindful” that George Bush might “lead us down the road to socialism,” and so Congress would monitor the bailout closely.

Wow.  When Barney Frank, just about the closest thing to an avowed socialist in Congress after Bernie Sanders, warns about the dangers of a Republican president and supposed “free market” champion leading us down the “Road to (socialist) Serfdom,” we should all feel a terrible chill.  To paraphrase the over-paraphrased Yeats:

Surely some revelation is at hand Surely the Second Coming is at hand! … what rough beast, its hour come round at last, Slouches towards [Washington] to be born? 

I received the most fascinating email from a group called ASTRA just now. I don’t think I ever even heard of them before, but apparently I’m on their mailing list. ASTRA is the Alliance for Science and Technology Research in America, a nonprofit, tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code.

Most people know that non-profits are not allowed to lobby for passage or failure of legislation. So let me now share with you ASTRA’s email to me. It may not be orginated by ASTRA and there could be several innocent explanations, but on the surface this looks like a clear violation of non-profit rules by an over-excited Washington, D.C. supplicant group.

[ Update: Cooler heads have it right. Non-profits are allowed to spend some percentage of their funds on lobbying. What I’ve noted here is an unclear violation of non-profit rules. What’s clear is that ASTRA is a big-government supplicant group not to be trusted by proponents of liberty and limited government.]

ACTION ALERT

Dear Friend of ASTRA:

WHAT HAS HAPPENED: The U.S. Senate has passed by a wide margin (74-25) an Economic Recovery Bill that contains important provisions beneficial to the science, engineering and technology communities – in addition to the massive restructuring made necessary by the current financial crisis The Senate measure includes the important tax incentives which either expired earlier this year or will by December 31.  The House will now vote on these provisions as well.  They include extension of the Research & Experimentation (R&E) Tax Credit and the soon to expire Alternative Energy tax incentives which make it more economically feasible to deploy alternative energy sources including solar, wind and geothermal power.

ACTION REQUESTED: ASTRA urges you to consider contacting your Member of the House of Representatives, which is expected to vote on the measure as early as tomorrow, Friday, October 3.

In particular, “Friends of ASTRA” who live in districts represented by so-called “Blue Dog” Democrats should communicate their support of the measure.  These individual Members who voted “No” against the original package include:

Baca (CA) Barrow (GA) Carney (PA) Chandler (KY) Davis (TN) Giffords (AZ) Gillibrand (NY) Hill (IN) Holden (PA) Lampson (TX) Matheson (UT) McIntyre (NC) Michaud (ME) Peterson (MN) Salazar (CO) Sanchez, L (CA) Herseth-Sandlin (SD) Schiff (CA) Shuler (NC) Scott (GA) Taylor (MS) Thompson (CA)

House Republicans who voted “No” against the original package but who might now be amenable to supporting the new measure also need to be contacted.  They include:

Aderholt (AL) Alexander (LA) Barton (TX) Biggert (IL) Bishop (UT) Blackburn (TN) Brown-Waite (FL) Boustany (LA) Conaway (TX) D. Davis ( TN) Dent (PA) Fallin (OK) Frelinghuysen (NJ) Gerlach (PA) Gingrey (GA) Goodlatte (VA) Hall (TX) Hastings (WA) S. Johnson (TX) Latham (IA) Latta (OH) LaTourette (OH) Lucas (OK) McHenry (NC) McMorris-Rodgers (WA) Mica (FL) J. Miller (FL) Murphy (PA) Myrick (NC) Neugebauer (TX) Petri (WI) Pitts (PA) Price, T. (GA) Togers (MI) Ramstad (MN) Roskam (IL) Shimkus (IL) Shuster (PA) Smith, A. (NE) Stearns (FL) Sullivan (OK) Thornberry (TX) Tiberi (OH) Wamp (TN) Young, B. (FL) Young (AK)

Time is of the essence.

HOW TO REGISTER YOUR OPINION QUICKLY: Please click on the following link, provided by the National Association of Realtors, if you are interested in participating in this exercise.  The link will provide instructions on how you can contact your individual Member of the House.

http://takeaction.realtoractioncenter.com/campaign/mainstreet?qp_source=wsjeesa

PLEASE SEND THIS  MESSAGE ON TO OTHERS:

This message has been sent to approximately 32,000 scientists, engineers, university employees, students, technology workers, policy makers, researchers and others on our “Friends” list.  An estimated total of  150,000 people will be contacted by this message, and we urge you to send it on to any friends, associates and family who may share our interest in passing this critically important legislative measure.

Thank you!

This e-mail was sent by ASTRA, located at 1155 16th Street, N.W., Washington, D.C. 20036 (USA). To receive no further e-mails, please click here or reply to this e-mail with “unlist” in the Subject line.

I recorded a video interview about the financial services bailout with Mark “Rzzn” Hopkins and Sean P. Aune of Mashable recently, focused particularly on the tech sector. We focused on making sense of things, something that hasn’t happened in Congress yet.

I think it’s pretty informative, and somewhat calming, as it should be. I’m less and less convinced that there’s a “crisis” that taxpayers ought to take pay for taking care of.

I’ve posted a copy of the proposed bailout legislation online in html format, which is easier to read, copy, and paste. Considering its size and significance, I urge you to review it and share it with others.

I pointed out before that my employer, the Cato Institute, has several experts on the bailout, and media producer Caleb Brown has ably drawn them out. Give a listen to his podcasts with Bill Niskanen, Jagadeesh Gokhale, Arnold Kling, and Gerald P. O’Driscoll. [all mp3 format]

There are a couple of elements of the legislation where I might add some insight, so here goes.

Congressional Oversight? Nope. $700 Billion Spent

The bill made available Sunday devotes a good deal of verbiage to oversight of the proposed $700 billion bailout. But it doesn’t do anything to prevent that money being spent. The major impediment to blowing through all the money is in Section 115, entitled “Graduated Authorization to Purchase.” It would immediately grant the Treasury Secretary authority to spend $250 billion. At any time, the President could send a certification to Congress and the spending authority would rise $100 billion more. After that certification, the President would have only to submit a plan to spend yet more and the Secretary’s authority would rise to the full $700 billion.

Only if Congress introduced and passed legislation to stop further spending would it be capped at $350 billion. Congress would almost certainly not pass such legislation, and even if it did the President could veto it, requiring an impossible-to-reach supermajority in both houses to stop the spending.

Passage of the “Emergency Economic Stabilization Act of 2008” would cause $700 billion to be spent – gone – just like earlier proposals. There is no effective limit on spending in this bill.

Yes, there are a number of oversight mechanisms, and no grant of unreviewable discretion as appeared in a ham-handed earlier proposal. These improvements are all about how the barn door will be closed once the $700 billion is gone.

Covering Over Economic Reality With a “TARP”?

The central feature of the bill is the creation of “TARP,” the “Troubled Asset Relief Program,” in Section 101. The TARP would exist to “purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary . . . .”

We know that mostly these are going to be mortgage-backed securities of the type issued by Fannie Mae and Freddie Mac. Fran and Fred issued these – and financial institutions bought them – with abandon because of the implicit (and now realized) government backing Fannie and Freddie enjoyed.

Currently, these securities have no value – “worthless paper,” everyone says. This is not because they are valueless, but because there is enough uncertainty about their value that nobody knows how to price them, so nobody is currently buying.

The idea behind the bailout plan, it seems, is to remake a market for this paper by having the federal government buy it. But it won’t work. And here’s why.

(N.B., I’m a lawyer and strictly an amateur with economics. There are weaknesses and disanalogies in what you’re about to read, but this is the best non-economic “Man on the Clapham Omnibus” explanation I’ve been able to assemble so far.)

Imagine there was a burgeoning trade in beach sand. Because of all the profits others had made on buying and selling beach sand, people came in to the beach sand market and bid up the price, hoping to get their cut of the money to be made.

Then one day, someone pointed out to all the beach sand traders that there’s beach sand all over the place at the beach. There’s so much beach sand that it can’t possibly be worth what people are paying.

Immediately, the market for beach sand would stop functioning, as everyone who held beach sand would not be able to find someone who would buy it at a price they could accept.

What’s the solution to this problem? A downward repricing of beach sand.

There is no alternative but for the market to reform around lower-priced beach sand.

Now, what if the government came in and bought $700 billion dollars worth of beach sand? Current holders of beach sand would get a tremendous windfall, and the government would get a lot of beach sand, but the market for beach sand would not be restored. It would only return when beach sand was again priced at a value that people believed was right. Taxpayers would be out $700 billion and the market for beach sand would be no stronger than before.

Now, there are disanalogies between what I’ve said and the proposed financial services bailout. Unlike beach sand, which is essentially infinite and thus very cheap, mortgage-backed securities actually do have some value. The market just has to discover what it is.

There are good buys right now, and some of the financial services firms that over-committed to mortgage-backed securities and other precarious financial instruments are good buys for smarter players too. These securities and the companies that held them need to be repriced, and there’s nothing the government can do to change that – or control their prices.

Another weakness in my story is that it omits the other roles that beach sand-traders might have. The financial services firms that got hung up on mortgage-backed securities do lots of other lending that lubricates our economy, and they might have a rough time doing it now. Say beach-sand traders are also integral to the glass industry – we’re looking at glass shortages because of the collapse in the sand market. But we had better face that reality rather than trying to avoid it with bigger, more audacious manipulations of economic value than we saw in Fannie Mae and Freddie Mac.

Government attempts to support the prices of mortgage-backed securities, of the housing stock, or of our country’s financial services firms will almost certainly end in disaster.

There is no putting a “TARP” over these economic realities, and there is nothing better we can do than to get on with letting the losers lose. No bailout.