Are the Government's Bailouts Hurting the Economy?

Bursting the Bubble

Mitchell said that the decline of those prices is key to reaching a bottom in the credit crisis and allowing a recovery.

"When you have an economy where people have no idea what the real value of assets is, what are homes really worth, what are investment banks worth because we don't really know what the value of the assets that investment banks hold," Mitchell said, "there's a degree of economic paralysis."

He said that once assets are valued appropriately, banks can begin making loans again.

"If you pop a bubble, prices go down, at least then you're starting from a position of much more certainty," he said.

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Experts like Boockvar contend that, under government bailouts, the price declines will occur at a slower pace than they would under bankruptcies. Mitchell acknowledges that criticism but said that bailouts just "slightly hinder the process."

"It won't be a major problem," he said.

Mitchell and others compare the U.S. government's recent interventions into private companies to the banking crisis that rocked Japan a decade ago.

In the 1990s, the country spent tens of billions to nationalize some of its failing banks after the institutions took too long to recognize and write down the bad assets on their books. It took Japan's banking system years to recover and, to this day, some of the banks continue to struggle.

Some say that Japan should have let its weakest banks fail.

"It is a matter of wise pruning," said Meir Statman, a finance professor at the University of Santa Clara in California. "You don't want to cut the trunk and you don't want to cut the main branches, but you do want to cut the weak and dead branches."

Supporters of the federal government's recent actions would argue that it did cut at least one weak branch when it declined to back a deal that would have kept Lehman Brothers, the country's fourth-largest brokerage firm, afloat.

Indeed, standing by and allowing Lehman to file for bankruptcy earned the federal government plaudits from some analysts and scholars, including Reinhart, who are concerned about moral hazard -- the idea that government bailouts will encourage businesses to make irresponsible decisions on the assumption that taxpayer money will serve as a cushion if things go awry.

Reinhart says he's now taking back his praise of the Feds.

"I would reverse myself on that view in the same way the secretary [Treasury Secretary Hank Paulson] reversed himself in his view of bailouts," he said.