The Bailout or TARP is incredibly unpopular among voters. I understand that. As far as they can tell money is being taken away from them and given to people who are much richer than them. To make matters worse those rich people got rich by destroying the economy and jeopardizing the tax payers job.
What surprises me is that the TARP seems to be unpopular among intellectuals and economists. Tyler Cowen offers a half-hearted defense:
Maybe you think that the bailouts will have disastrous long-run consequences. And maybe they will, I worry about this too. But if anyone should know that modern politics can only stand so much short-run panic, it is libertarians and fans of Bryan Caplan’s book. If we had not done the bailouts we did, we would, within a few months’ or weeks’ time have received a much worse and costlier bailout run by Congress and Nancy Pelosi. How does that sound?
There would have been a worse bailout – that’s the defense?
How about the fact that we stopped the second Great Depression. We prevented untold human suffering and a destabilization of governments in developing countries that could have lead to a vastly more dangerous world.
In my mind the entire point of macroeconomics was that when it happened again — when the forces that created the Great Depression materialized again — we would stop it.
It happened again and we stopped it. That’s success.
Megan McArdle worries about moral hazard.
The bailouts have probably substantially increased moral hazard, and perversely, arguably undermined the political will for regulation that might reign in that moral hazard.
Yes, moral hazard exists but it is not the end of the world. If the bailouts reduced the incentive for more regulation or tighter self-control because they reduced the actual systemic damage to financial crises then that is good thing. The world is a safer place.
And, specifically it makes no sense at all to worry about moral hazard in reference to preventing wholesale catastrophes. The ultimate problem with moral hazard is that it will make bad realizations more likely. However, if the worst realization is coming true and you don’t stop it then it happens with probability one. You can’t get worse than that.
I think people latch on so tightly to moral hazard because it conforms to their moral intuition. Throughout the rest economics people are constantly told that economics is not a morality play, the virtuous are not rewarded nor the wicked punished. But, here under the guise of moral hazard is finally a chance to punish the wicked and people are not going to let that go without a fight.
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Tuesday ~ August 25th, 2009 at 1:16 pm
Steve Hamlin
I think the issue that even ‘intellectuals and economists’ have is that the Bailout / TARP happened, AND that moral hazard wasn’t the least bit touched upon in the course of the bailout. Those people see the possibility of doing both, or view the refusal to at least discuss doing both as an indicator of the deficiencies of the underlying intellectual/ideological approach to the problem.
From my reading of your post, you seem to think there were only two discrete alternatives, with nothing else possible:
(1) No bailout, moral hazard is squashed, GD2 happens. GD2 cost is greater than Bailout cost.
(2) Bailout, moral hazard not touched upon, GD2 doesn’t happen. Bailout cost is less than GD2 cost.
What peeves a lot of people, who agree that the Bailout was better than GD2, is that the Bailout could still have occurred, while including provisions that would attempt to reign in the moral hazard. Remediation in the course of redemption.
Why couldn’t we have had the Bailout along with moral hazard reduction? Are they completely and necessarily incompatible; efforts at odds with each other? Or was the Bailout needed so quickly that anything remotely dealing with moral hazard was not possible to do at the same time and the Bailout?
Wednesday ~ August 26th, 2009 at 10:01 am
ao
Karl,
I agree with the first half of your post that economists and the public don’t seem to be fully appreciating the fact that we stopped the great depression 2.0, and that’s a tremendous success.
I think you are incorrect here though:
“However, if the worst realization is coming true and you don’t stop it then it happens with probability one. You can’t get worse than that.”
I think that this ignores the time inconsistency problem inherent in the moral hazard of bailouts. Yes, if we’re concerned about the outcomes in the next 6 months, or even few years, then the worst realization is a depression. But we’re concerned about the future too, so a worse realization than that might in fact be to succeed in preventing this depression, but make repeated depressions 30% more likely over the next 10 years. That’s the point of the moral hazard issue.
I don’t necessarily agree with this, but I think it is incorrect to imply it is not a possibility.
Steve,
You say that “moral hazard wasn’t the least bit touched upon in the course of the bailout”, but that’s exactly why they let Lehman Brothers fail. Maybe that’s no longer a credible threat, but it was certainly something huge and costly that was done in the name of moral hazard.