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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  • Methinks1776
    The financial markets are regulated to death. Any more regulation and the market will cease to exist altogether. Who can buy what when and from whom is all dictated by the government already.

    And that's the problem. There isn't really a market. People, by and large, aren't choosing freely. Lenders aren't choosing freely. Just yesterday my local bank manager told me that they are once again being required to make loans to people to whom the bank doesn't want to lend and on ridiculously generous terms. Banks aren't even allowed to assess credit worthiness if a person belongs to a certain (and growing in number) protected social group. Where do you think that directive is coming from? The regulator, at the behest of politicians.

    The market has failed alright. It's failed to survive the assault on it. Instead, we have gigantic fascist institutions which do the politicians' bidding in return for protection from the consequences of failure. And as new regulations are enacted, the competition to these monstrosities dies. FINRA has lost about half of its broker dealers over the past year. The CBOE has lost plenty as well. The competition to government monstrosities is, predictably, leaving.
  • wintercow20
    Quis Custodiet Ipsos Custodes ... if someone wishes to argue that there is a market "failure", and there might be, then it is highly likely that governments fail and precisely for the same reasons.

    In any case, I have always found it odd that (even economists) point to the existence of certain external costs as evidence of market "failures." These are no different than any other costs. Even Coase went too far when arguing that "Transactions Costs" are relevant and signify a possible market failure. What makes transactions costs different than any other cost that results in a potential transaction where the costs exceed the benefits? Would telecommunications and cable line costs indicate a market failure because I could not chat with someone on the other side of the globe a mere 25 years ago? Would the government then have a justification for remedying ANY problem where the costs exceed the benefits?
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