Of Moral Hazard and the Danger of Dithering
If I sound exasperated sometimes, it’s because I am. Dave Donadio cites a letter from a whole load of economists questioning the bail-out. Quoth the Donadio:
What do Paulson and Bernanke have to say about the moral hazard argument — what’ll happen if the government keeps encouraging people to invest in excessively risky or underperforming assets?
Come on, Dave. Call me crazy, but I think the chairman of the Fed has heard of moral hazard before. I think the fact that he’s doing this is a sign of just how bad things are getting. This isn’t about re-inflating a bubble. This is about managing our likely-inevitable decline.
Here’s an anecdotal article about companies not being able to roll over their revolving debt. Here’s some more anecdotal evidence about spillover happening into the real economy.
A friend of Greg Mankiw’s writes him a note:
A LOT of payrolls get paid at the end of the month. The next for many companies is September 30. Three different people with hugely relevant knowledge said to me today words to the effect of: “Why don’t your economist buddies want [insert fortune 100 company/companies here] to be able to pay their employees on Tuesday. If Washington doesn’t do something now, they won’t be able to”.
Mankiw replies in the same post:
On the one hand, I share many of the concerns of the letter signers and other critics of the Treasury plan.
On the other hand, I know Ben Bernanke well. Ben is at least as smart as any of the economists who signed that letter or are complaining on blogs or editorial pages about the proposed policy. Moreover, Ben is far better informed than the critics. The Fed staff includes some of the best policy economists around. In his capacity as Fed chair, Ben understands the situation, as well as the pros, cons, and feasibility of the alternative policy options, better than any professor sitting alone in his office possibly could.
If I were a member of Congress, I would sit down with Ben, privately, to get his candid view. If he thinks this is the right thing to do, I would put my qualms aside and follow his advice.
Reading layperson commentary these past two weeks is really driving me up the wall—even when it’s generally solid like Dave’s polemic from yesterday.
Take Mankiw’s post to heart, people. This isn’t shady Iraq WMD intel being doctored up. This isn’t a nefarious plot. This is real.