Wednesday, January 30, 2008

Moral Hazard? Is that the word?

So -- the internet, to me, has largely been an indirect education in economics. There are a lot of economic bloggers, delong, dean baker, paul krugman, greg mankiw, tyler cowen, calculated risk out there, and political blogs, and even pop culture blogs, are sodden with economic concepts and figures.

One of the things I've learned about is how economists view recessions. There is a certain hard-line attitude that conservative (and some liberal) economists take toward recessions. In this attitude, the recession is viewed as a sort of cleansing -- people got too excited, investment went where it shouldn't have, and those who invested poorly must reap the consequences of their stupidity. It's a typical republican/conservative belief.

But the counter argument, which I find convincing, is that the suffering that results from recession is neither necessary nor truly instructional. Brad Delong gives a really good treatment of why this is the case, but I'm too lazy to look it up.

One way to think about the argument and counter argument about recessions is through the lens of the differing responses to the depression made by the Hoover and Roosevelt administrations.

Hoover said the government couldn't do anything and the market just had to sort itself out. Roosevelt felt otherwise.

My own feeling is that this idea that the people who suffer in recessions deserve to suffer is entirely repellent.

But . . . there is something about the disclosure, in extremely stark terms, by various investment companies, Merryl Lynch, UBC, that French company blaming half its losses on a rogue trader, of tremendous losses satisfying. I don't find it satisfying out of schaedenfreude. I find it satisfying because public language about the economy during a bubble is so profoundly opaque and evasive. I consider myself reasonably well informed and reasonably cynical, but when people, even flaks, even morons, argue points in public vigorously, they muddy the waters such that maintaining clarity about the state of the world is difficult. That's my experience anyway.

So when you have these almost confessional reports of huge losses, there's something of the triumph of reality over spin in that.

Even though this by no means calls for us not to act in the face of recession, I think it's good for our souls to have the ugly truth so nakedly thrust into the public sphere.

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