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If you only read one post…No, that’s not right since you’re already reading this one. If you only read one other post today, it should be Brad DeLong’s marvelous explication of the financial mess. It lays out the ways of dealing with financial crises, generally, and how what’s been done in practice relates to the theory.

Particularly helpful are his observations at the end of the post, most notably this:

Fourth, there is now no time for tolerance of the three objections to this analysis and this plan of action, roughly: (1) it’s immoral, (2) it’s unfair, and (3) it can’t work in the long run. To expand a bit:

  1. It’s immoral because people have a right to be treated like adults–which means that they have a right not to be rescued by the government from the consequences of their bad judgment, and we are violating that right.
  2. It’s unfair because feckless greedy financiers who caused the problem ought to lose money and aren’t–or aren’t losing enough money–and because feckless greedy imprudent thriftless borrowers who caused the problem ought to lose money and aren’t–or aren’t losing enough money.
  3. It won’t work–at least not in the long run.

I dismiss objection (1). It is made, mostly, by those who speak for the Princes of Wall Street. Note that the Princes of Wall Street themselves are not opposed to what the Federal Reserve and the Treasury and the congress doing–anything, anything at all that promises to raise asset prices is something that each of the Princes of Wall Street would trade at least one of their organs of generation for. But those who speak for the Princes of Wall Street–well, they really believed that the Princes earned their fortunes by virtue of their virtue–their intelligence, their nerve, their skill, and their willingness to run great risks for great rewards. The idea that there is a public safety net to catch the Princes when they all fall off the tightrope at once–that they are not actually rugged Randite individualists running great risks–that they are people in the right place at the right time with enough low animal cunning to cover themselves with glue and then step outside at 57th and Park or on Canary Wharf as the money blows by so that a bunch of the money sticks to them–well, this strikes those who speak for the Princes of Wall Street on the editorial page of the Wall Street Journal or in Investors’ Business Daily as a betrayal of the moral order.

The response to objection (1) is that the people who make it need to grow up. There is no more a John Galt or a Jane Galt than there is a Santa Clause. There are no Randites in a financial crisis–or no even quarter-sane Randites. The fact that there is a safety net in a financial crisis is something that has been obvious to everything with a spinal column for at least a century and a half–that’s what central banks are for, for Jeebus’s sake! The Princes of Wall Street did not earn their fortunes by virtue of their virtue, their intelligence, their nerve, their skill, and their willingness to run great risks, et cetera, et cetera, low animal cunning, glue, money sticks as it blows by.

That final comment is probably as fine an explanation of how our financial system actually works as any I’ve ever read.

For the rest of his observations you should read the whole thing.

3 comments… add one
  • fabius.maximus.cunctator Link


    Thx for pointing out Brad DeLong. I found his post a lot more plausible than the endless rants about moral hazard and the evils of state intervention in business I find in many other places. While I fully accept the mh “concept” I would prefer a certain amount of mh to the risk of a full scale meltdown.


  • Indeed. Quite some number of folks out there are what one blogging acquaintance of mine calls “Right Bolsheviks”—ideologues who care little for actual outcomes.

    One of the things they’re missing IMO is that any government, whether Republican or Democratic, free market or socialist, would intervene under the present circumstances. The question at hand is the nature of the intervention, not whether the intervention would take place.

  • fabius.maximus.cunctator Link


    Funny you should say that. Something along those lines (socialism not bolshevism) did occur to me after reading Nouriel Roubini. He seems to see this thing as an occasion to display religious fervour. Not me, I ve too much tied up in all that.

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