Stephen Bainbridge has an extremely solid post on Barack Obama’s speech on the economy. It’s pretty even-handed finding somethings to criticize:
I see a subtle suggestion that finance is all smoke and mirrors, while manufacturing, farming, and the like (hence, the code word productivity) are real sources of wealth. The appeal here is to guys who think like Carl Fox, who told Bud to “Stop going for the easy buck and start producing something with your life. Create, instead of living off the buying and selling of others.†The implication is that financiers, like Gordon Gekko, “create nothing.â€
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I find his suggestion that the government can somehow prevent the “cycle of bubble and bust†troubling. Even if you don’t buy Day’s contrarian theory about the nature of bubbles, it’s worth remembering that what we call bubbles and busts are an inherent attribute of the process of creative destruction that lies at the heart of capitalism. Striving to eliminate the risk of occasional market blips risks eliminating the space within which creative entrepreneurs function. Think of a child so swaddled in protective gear that they cannot even play. Put another way, there is both an economic and ethical case to be made for a limited social safety net. Attempting to drape a safety net under the entire economy, however, turns the federal government into an insurer of the entire economy and, as such, carries a serious moral hazard problem.
and some that, like me, with which he is in broad agreement:
The lender of last resort is, in effect, an insurer. Because insurance inherently raises problems of moral hazard, every insurer, whether public or private, has an interest in the amount of risk the the insured takes on. Here, however, we can still look to market-like solutions. Ideally, Fed regulation ought to replicate the same kind of creditor protections that depositors would want if they were not protected by deposit insurance. Unfortunately, much banking regulation historically has gone far beyond what a private creditor would insist upon. Instead, much banking regulation was designed to protect certain interest groups from competition. The Glass-Steagall act for example served mainly to protect securities underwriters from competition by commercial banks.
If you’re interested in following what is likely to be the hottest issue in Campaign 2008, check it out.
