In time of war, there is a tendency for both political parties to rally around the president, as we saw (all too well) in Iraq after September 11.In time of financial panic, there is often a similar inclination.The two presidential candidates, for example, are being careful in their statements.I don’t blame them.The issues are too complex to be taken on inside the context of a political campaign.Both candidates realize that the danger of a verbal misstep that the other side can try to blame for worsening the crisis is far greater than the likelihood that either one will come up with a brilliant solution that will gain widespread support or will solve the problem, let alone both.
Category Archives: financial crisis
Investment Banks, River Banks, and Moral Hazard
Quite a few excellent economists are worried about moral hazard in financial markets. Vince Reinhart wrote a Wall Street Journal column rebuking his former bosses after the Bear Stearns intervention: “…the Federal Reserve’s action can only be viewed as rewarding bad behavior.” Ken Rogoff recently wrote in a Financial Times column, “it is important to be tougher in busts, so that investors and company executives have cause to pay serious attention to risks. If poorly run financial institutions are not allowed to close their doors during recessions, when exactly are they going to be allowed to fail?”
“No Atheists in Foxholes.” — No Libertarians in Financial Crises.
Someone this week asked me what I thought of policy-makers who ex ante profess a free-market ideology and acute sensitivity to the dangers of moral hazard from financial bailouts, but who toss that ideology overboard when faced with a financial crisis. The reference was to Treasury Secretary Henry Paulson’s lobbying this week in support of a rescue for Fannie Mae and Freddie Mac, the two big home mortgage agencies, following on the rescue of Bear Stearns in March. My reply was: “They say there are no atheists in foxholes. Perhaps, then, there are also no libertarians in financial crises.”