Garett Jones and Daniel Rothschild discuss similarities between the Katrina recovery and the bailout on Forbes.com.

On the surface, Hurricane Katrina and the financial crisis might not seem to have much in common. One was a natural disaster, the other a story of man-made markets collapsing. One struck the poor and defenseless, the other, the hubristic masters of the universe. One concentrated its wrath on a small area of the Gulf Coast, the other will have effects felt across the country and indeed the world. But Washington used a similar recipe to respond to both crises: Create programs that quickly shift from one purpose to another, mix with complete opacity in the policymaking process and add some frequent and seismic shifts in what economists call the rules of the game. The result is quite predictable: A bad situation that grows much, much worse. For example, compare the Louisiana Road Home Program, intended to compensate Louisianans whose homes had been damaged by Katrina, to the Treasury Department's Troubled Asset Relief Plan, TARP. The Road Home Program was intended to encourage Louisianans to return home and repair their owner-occupied properties. However, it quickly morphed into a social engineering scheme that fell between the Department of Housing and Urban Development's rules for a compensation program and a revitalization program; it was a hybrid that fell into a regulatory black hole from which homeowners are still trying to escape. While initially designed to rapidly provide rebuilding assistance to residents, it was loaded down with caveats and clauses meant to engineer a particular rebuilding plan, rather than allow the rebuilding to emerge spontaneously. Government rules became government direction, and private decision making was shoved into the back corner. As a result of this mission creep, the program became painfully slow: By the end of 2007, two years after Katrina, only about one-fourth of Road Home applications had been finalized. The biggest problem with Road Home was that it caused people to wait for promised federal help, and indeed, some people are still waiting. The initial promise of quick and easy government assistance combined with inept program administration and a 57-step application process mean that even three years after Katrina, thousands of homeowners are still waiting for their checks. What's more, the social engineering aspects of the program, intended to rebuild whole neighborhoods, have failed miserably. So government action delayed private action and government plans crowded out local solutions. But if you liked the effects of Road Home, you'll love the results of TARP, or as it's now called under new Treasury Secretary Tim Geithner, the government's "Financial Stability Plan." According to former Treasury Secretary Henry Paulson, the bailout plan had to be passed to prevent a full-scale collapse of world financial markets. Congress dutifully passed the bill, yet the stock and commercial paper markets collapsed anyway, a sign that the markets didn't like what they saw in the bailout bill. Now, in a classic example of mission creep, the old TARP funds have become auto bailout funds, mortgage restructuring funds, and most ominously, equity investment funds. As the rules change on a weekly basis, businesses are just sitting on the sidelines, and investment spending is plummeting. Both the Financial Stability Plan and the Road Home program favor stability over progress and predictable mediocrity over vibrant innovation. And both make the government a dominant--indeed, domineering--partner in recovery. Every day, we see the new demands put forward by the Treasury, by congressional chairmen, by senators. They're almost acting like they own these companies. Which, of course, they almost do. But more significantly, these twin bailouts weaken the entrepreneurial impulse that is vital for effective rebuilding, whether on the Gulf Coast or in financial markets. In Louisiana, areas where entrepreneurs and innovators have taken the lead in rebuilding are light years ahead of areas still waiting on Road Home checks. Opting out of the government's shekels means opting out of government's shackles. The financial bailout is teaching the banking sector (a term that seems to encompass more of the economy with every passing day) to behave like a government agency: keep your head down, and better to be safe than sorry. Customers are to be tolerated, not served. Above all, be risk averse, and paper over any failures no matter how glaring. This was the mentality that in post-bubble Japan created zombie firms and zombie banks, which led to a decade of stable, no-work jobs at the price of wage stagnation, profit stagnation and productivity stagnation. Welcome now to American zombie banks and zombie mortgages, to a world where the titans of Wall Street learn to act like predictable, dependable, innovation-free federal bureaucrats, where people are held captive in their homes because they've got low-cost, government-subsidized mortgages. Over the next few years, we'll be reminded again that the two words in Schumpeter's famous phrase, "creative destruction" are only offered as a package deal. Economics shows that government failure is at least as important as market failure; the mismanagement of Katrina provides too many real-life examples of so many government failures. And as endless bailouts encourage the private sector to behave like government agencies, we'll get to see supposedly private businesses duplicate many of the failings of government bureaucracies: the caution, the sluggishness, the deference to government power. That's just what post-Katrina policy encouraged Louisianans to do. And it's what the Bailout Nation is doing now to our financial markets, our auto companies, and, if we're not careful, to the rest of the U.S. economy. Garett Jones is assistant professor of economics and senior scholar at the Mercatus Center at George Mason University. Daniel Rothschild directs the Mercatus Center's Gulf Coast Recovery Project.