By Jeffrey A. Miron

CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

This bailout was a terrible idea. Here's why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

The opinions expressed in this commentary are solely those of the writer.

While watching the Olympics, we tend to cheer participants along national lines. We root for our country's athletes over those from the rest of the world. While there is nothing wrong with this fun diversion, the concept of the individual must never be lost amid the ideal of the collective — the belief that the members of the collective (the nation in this instance) are faceless automatons dedicated to serving the whole.

Before I continue, let me introduce a mathematical term that will help expose the fallacy of the collective: the fractal. Briefly, a fractal is a shape that can be split into parts that are each as complex as the original shape itself.

Consider a tree: the main branches are as complex as the tree itself. In essence, the branch is "a reduced-sized copy of the whole." A branch planted in the ground would be indistinguishable from a tree. Iteratively, the branches of the branches are themselves reduced-sized copies of the tree, and so on.

Additionally, consider computer-generated images that have fractal qualities. Here, a complex structure is drawn that appears to have ragged, yet well-defined edges. A closer view of an edge reveals a structure that is as complex as the original image. This continues iteratively as each closer view reveals new and equally complex structures, ad infinitum.

The point is that each closer view reveals new complexity and uniqueness. In essence, the more we know, the less we know.

Now we turn our attention toward the structure of society.

The topology of society has fractal qualities. Starting from a global view, we tend to see countries as homogenous aggregates. We assume that each country has certain attributes that replicate to all inhabitants — there are Chinese and there are Americans.

In this view, citizen A of country X is nothing more than an instantiation of the ideal-type of the aggregate characteristics attributed to X. We immediately claim to know everything about A simply from the fact that A is a citizen of X. They act that way because he is French and she is Russian. This is a dangerous oversimplification of acting men and women, as we shall see.

Next, let us apply the concept of fractals and refocus our attention on country X alone. By looking exclusively at X, we recognize variations among its various regions. Instead of a homogenous group, we find complexity that is similar to the complexity found relative to the countries of the world. Taking the United States as our example, we recognize differences between residents of (say) Ohio and California. All of a sudden, our homogenous ideal-type American is now the aggregate of various and unique groupings.

Dare we create the ideal-type Ohioan? Certainly not, since a closer view of Ohio reveals variations within the state that are as complex as those between the states. As we work our way through iterative views, we arrive at the evil aggregate: the community.

I single out the community, as it is this concept that allows all larger views to have meaning.

The call for the collective begins with the community. From the first days of kindergarten, public schools drum the concept of community into the minds of children. The schools instruct children to view themselves as similar and indistinguishable components of their communities, regardless of whether the community is school or school district or some other aggregation.

To that end, public schools define themselves as "communities of learners" — not as individuals, but as community whose faceless members strive toward the collective good.

Issues that affect a community affect each member (or child) equally. Children are to act in a manner that makes their school proud. They are encouraged to propose community projects and are required to volunteer for community service. The inherent message is that dying — figuratively in this instance — for the collective is the desired fate in life.

Universalism and collectivism cannot accept this democratic solution of the problem of government. In their opinion the individual in complying with the ethical code does not directly further his earthly concerns but, on the contrary, foregoes the attainment of his own ends for the benefit of the designs of the Deity or of the collective whole.

Yet community is always ill defined. Is your community your neighborhood or one of the many overlapping political subdivisions? Or, is your community those whose company you enjoy?

Those who want to start the study of human action from the collective units encounter an insurmountable obstacle in the fact that an individual at the same time can belong and — with the exception of the most primitive tribesmen — really belongs to various collective entities. The problems raised by the multiplicity of coexisting social units and their mutual antagonisms can be solved only by methodological individualism.

Once the idea of community takes root, children have a difficult time seeing themselves as anything other than a collective part. Sadly, this follows the child through to adulthood. Tax issues are proposed for the benefit of the community. And good community members must always support the collective ends.

Therefore, starting with the collective community, it is easy to widen the view (to zoom out if you will) in order to incorporate greater horizons, ending with the collective nation and its government. If you must sacrifice to be a member of your local community, you must also sacrifice to be a member of your nation, regardless of its policies and actions.

If society or state is an entity endowed with volition and intention and all the other qualities attributed to it by the collectivist doctrine, then it is simply nonsensical to set the shabby individual's trivial aims against its lofty designs.

However, acting men and women are not drones working for the good of the hive. When humans are controlled by the central authority, they no longer act; they react. And, as Mises proved long ago, humans reacting to the commands of the dictator are not constructing a hive, they are simply consuming the remaining honey — the capital — and awaiting a very cold winter.

Yet even the community itself is the aggregation of various and unique groupings. Closer views reveal the family. And even families are the product of various and unique entities: individual acting men, women, and children. It is this complexity — the essential complexity of the individual — that explains why discussing politics and parenting among family members is so tricky. It also explains why watching the football game is safer than table talk on a long Thanksgiving afternoon. But it is this complexity that allows for the growth of the division of labor, which advances and improves economies.

There are two views of the structure of society. There is the collective view, which falsely creates ideal-type aggregations and assumes all members are instantiations of that ideal-type. And there is the Austrian view, which sees only the individual and does not attempt to create any aggregations.

All varieties of collectivist creeds are united in their implacable hostility to the fundamental political institutions of the liberal system: majority rule, tolerance of dissenting views, freedom of thought, speech, and the press, equality of all men under the law.

The Austrians, on the other hand, see the individual despite the geopolitics of the day, and it is the focus on the individual that leads increasingly toward liberty.

Cheer your home team. And cheer the fractals who are your neighbors, friends, and colleagues. Do not lose them in a collective haze.