Bill Whittle recently had a very painful medical mishap, which inspired him to refer to “the $700 billion kidney stone the economy is trying to pass.” He prescribes some therapeutic pain:
Every decision we make is based on a risk/reward calculation. If we take away the consequences of risky behavior, we will see more of it. And if there’s a money-back guarantee for greedy and stupid decisions, we’re in real trouble, because there is only so much money in the bank but supplies of greed and stupidity are endless.
So how do we inflict some badly-needed pain on people who need to feel it, without hurting the rest of the good and honest folks who pay their bills [responsibly]? Well, there are three simple rules that we must follow. Unfortunately, no one knows what those three rules are. So here we are. I’m as flummoxed as the rest of you.
At the risk of being a name-dropper, prominent economist Greg Mankiw was a classmate of mine as a Princeton undergraduate. (I didn’t know him at school, but chatted with him at Reunions once. He seemed like a nice man.) On his blog he’s been fairly neutral about the bailout — he doesn’t seem to dispute that something big has to be done, but he does inject a cautionary note:
Nonetheless, one has to be at least a bit skeptical about the idea that government policymakers gambling with other people’s money are better at judging the value of complex financial instruments than are private investors gambling with their own.
Now, Greg Mankiw wrote a best-selling economics text and did a stint as Chairman of the Council of Economic Advisors under President Bush. I took introductory econ courses at Princeton, and also at Rutgers while working toward an MBA I didn’t finish, and to this day I get confused about the effect of currency exchange fluctuations on domestic inflationary pressure.
So I’d like to take this opportunity to point out a flaw in Greg’s reasoning: seems to me that “private investors gambling with their own money” does not describe the process that got us into this mess. The damage seems to have been caused by titans of Wall Street gambling largely with other people’s money.
I’m by no means a Wall Street basher — I worked there for nearly 15 years, and would be willing to do so again. (I called an ex-boss who’s still at Merrill Lynch… it turns out they’re not hiring this month.) But I certainly understand the impulse to bash Wall Street and the financial Establishment — vital institutions led by people who have a lot to answer for.
Count on uber-libertarian Ron Paul to step up to the plate (hat tip: Bill C.). Under the headline “The Creation of the Second Great Depression,” he writes:
The bailout package that is about to be rammed down Congress’ throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder.
I’m not sure Congressman Paul’s internally coherent but overstated case actually constitutes “wisdom” as referenced in my headline, but it certainly is a colorful dose of what he believes is moral clarity. Who knows, maybe he’s right. I can see why he has a strong following… and why he’ll never be president.