Responsibility for the Irresponsible

by Don Boudreaux on December 3, 2009

in Intervention, Regulation, Seen and Unseen, The Crisis

I’m a bit confused by Ed Glaeser’s column in today’s Boston Globe.  It’s unclear if he blames markets per se for much of the recent financial meltdown, or, instead, blames insufficient regulation in light of the reality that Uncle Sam is always too likely to bail out too many big (and even not-so-big) firms.

If the former — that is, if Glaeser believes that financial markets are so inherently unstable that greater, smarter regulation is required to protect the economy — then today’s turmoil provides no solid evidence for that belief.  Fannie and Freddie were widely understood to enjoy the backing of Uncle Sam.  And given the hair-trigger “Do Something!  Anything!” politics that has long been dominant in Washington, it’s quite plausible that Bear, Stearns, Lehman Bros., and many other highly visible firms understood themselves — and were understood by others — to be implicitly backed by the U.S. government.

If the latter — that is, if Glaeser is arguing that “too big to fail” is politically unavoidable and, thus, that it is this unalterable political fact that creates harmful moral-hazards that must be regulated against — then a curious inconsistency infects his argument.  In one breath Glaeser concedes that government’s intemperance at putting politics ahead of sound economics is the source of major moral-hazard problems; then in the next breath he asks government – the very entity whose irresponsibility causes the problems – to behave responsibly in dealing with these problems.

If my 12-year-old son insists on shooting his BB gun inside of my living room, I take the BB gun away from him.  I don’t merely, meekly ask him to try to improve his aim so that he stops cracking the television screen and breaking the windows.

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