Here’s a letter I recently sent to the New York Times:
TO THE EDITOR:
Amar Bhidé argues that “governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks.” (“Bring Back Boring Banks,” Jan. 4).
The lure of profit is why banks take on risk in the first place. But the specter of loss encourages them to be prudent about it. When governments remove losses from the equation, banks lose any incentive to keep their risk-taking in check. Someone else will pick up the tab if a plan doesn’t work, so why not take a chance? Hence the financial crisis.
Capitalism is a system of both profit and loss. Wishing losses away would have consequences quite different from Bhidé’s good intentions.
Washingon, Jan. 4, 2012
The writer is a fellow at the Competitive Enterprise Institute.
Russ Roberts nails it over at Cafe Hayek:
Please remember that the cost of the TARP isn’t the cost to taxpayers. Even if banks paid back every single penny, the cost of the TARP is that it reduces current and future prudence.
I recently finished reading Swedish economist Johan Norberg‘s book about the financial crisis, aptly titled Financial Fiasco. It’s both short and informative. Six chapters and 155 pages, all of them worth reading.
The first two chapters are about the two big regulatory causes of the recession. One, monetary policy that was too easy for too long. The price system works. When the Fed messes with that price system, prices send out the wrong signals. People behave accordingly. Two, a decades-long drive to raise homeownership rates caused a lot of people to take out loans they couldn’t afford. It was only a matter of time before the consequences would come to bear.
Chapters 3 and 4 are about how the private sector reacted to the incentives regulators gave them. Let’s just say they acted badly. If people can game the system, they often will. Norberg’s criticism of overly-complicated securitized mortgage packages is both shocking and infuriating.
Chapter 5 is about how the government and private sector reacted to the crisis once the housing bubble popped. The $700 billion bailout program to reward bad behavior comes under fire.
Norberg is in top form in Chapter 6. Having looked at the causes and consequences of the crisis, now he offers a way out. One lesson is that politicians will always behave badly. “Politicians who distribute pork they cannot afford are reelected; butcher shops that sell pork they cannot afford go bankrupt. (p. 150)” Politicians are just like you and me. They go wherever their incentives lead them. We need to approach them accordingly.
The way to a full recovery is not bailouts. It is letting bad companies fail. And just as important, letting good ones prosper. “Government support for companies is thus not a way to save jobs, as politicians try to make us believe. It is a way to move jobs from good companies to bad companies.” (p. 151) In the long run, bailouts keep the economy down by keeping jobs and resources away from where they would do the most good.
Financial Fiasco has echoes of Tocqueville; a foreigner is trying to figure out how America works. Norberg, like Alexis de Tocqueville, is uncommonly perceptive. His experience living under an economy more thoroughly mixed than America’s allows him to see things that have escaped American commentators. This is extremely valuable. The fact that his book is concise, well written, and accessible to those of us who don’t have economics Ph.Ds makes it even moreso.
Posted in Bailouts, Books, Business Cycles, Economics, Monetary Theory, Public Choice, Uncategorized
Tagged Bailouts, Business Cycles, fannie mae, federal reserve, financial crisis, financial fiasco, freddie mac, johan norberg, Public Choice, recession, the fed
Russ Roberts’ testimony in front of the House Committee on Oversight and Government Reform is superb. Read it (it’s short). Wall Street deserves plenty of blame for the financial crisis. But Washington deserves more:
When your teenager drives drunk and wrecks the car, and you keep giving him a do-over—
repairing the car and handing him back the keys—he’s going to keep driving
drunk. Washington keeps giving the bad banks and Wall Street firms a do-over. Here are
the keys. Keep driving. The story always ends with a crash.
I’m mad at Wall Street. But I’m a lot madder at the people who gave them the keys to
drive our economy off the cliff.