Comments on: Moral Hazard: Lessons of Parenthood

By: nepr

nepr — Sat, 20 Sep 2008 06:29:04 +0000

In Econ 101, students are taught to avoid arguments that rely on a Fallacy of Composition. Here's a wiki link:

http://en.wikipedia.org/wiki/Fallacy_of_composi...

Your analogy meets this definition, I think, as does any that asks, "What if something big and complex was like something small and simple?"

Another issue I have is the usefulness of simply stating that, "Too big to fail", is bad, without suggesting what can be done about it. I'd say that the obvious remedies are nonsensical. What criterion could policy makers/regulators use to define "Too big"? How could they know ahead of time that they'd got it right? It would have to be an, essentially, arbitrary, and therefore useless, definition. And, of course, nothing can be done to make sure that a business won't ever fail. So, what's to be done?

There's also this issue

http://www.nytimes.com/2008/09/20/business/20fu...

Here, the problem isn't the size of a company, but the size of a Market. How does one prevent a market from getting, "Too big to fail?"

Lest I be accused of being only a naysayer, let me present another analogy (from Econ 101). Suppose you are a King, setting up a market of arbitrary size and complexity (no FoC!). You take a cut of every transaction. You make your guard and your magistrates available to punish malfeasance and adjudicate disputes. What's your best scheme of management?

I would say that your responsibility, and interest, is to make sure that the market functions; not to decide who the winners and losers will be, or that only the wise, the frugal, the prudent are rewarded. Your only constituent is the market, itself.

Obviously, you want people to be treated fairly, or they'll stop coming, but there are limits to what you can do. Hard fast, unbendable rules, especially any that are based on "market-external" considerations (like the moral and the good) should be avoided. You should, to the extent possible, let the market, itself, set the rules, making sure that you have the resources, including your own treasury, to intervene only when absolutely necessary.

If you're smart, you'll be humble. Market forces are subtle and often inscrutable and are best left alone and not encumbered or directed. This, of course, is one of the main justifications for accepting free market capitalism, with all it's faults and excesses and injustices.

And, one last thing you, the King, have to be willing to accept: the whole thing can fall apart without warning, at any time. Then, you clean up and decide if you want to do it all over again.

.

By: kritt11

kritt11 — Sat, 20 Sep 2008 00:34:24 +0000

Elrod-

If you're having fun now, just wait until the teenage years! Everything becomes a long, drawn out negotiation--- I have considered hiring a lawyer to represent my side, or tape recording myself so I remember what I've said in previous arguments.

Just wait until your child decides its completely worthwhile to spend 90 minutes arguing with you whether or not he/she can go to the mall with friends but won't waste 4 seconds changing the toilet paper roll! LOL

By: DLS

DLS — Fri, 19 Sep 2008 21:54:12 +0000

George — make no mistake. I cannot stand the deadbeat borrowers being bailed out. But in this case, that is an indirect or additional consequence (not unnoticed during this campaign season, obviously — it's an election issue, the economy). The real objective is to bail out the banks; the real, direct, intended-first-and-foremost beneficiaries are the banks and the others on Wall Street who are (too) intertwined with the banks. (I repeat my observation that the current events we see include additional merging of banking with investments and with insurance, and ask rhetorically whether we want to see that.)

By: DLS

DLS — Fri, 19 Sep 2008 21:51:25 +0000

Actually, you don't even have to spell out unpleasant consequences for failure (a more broad category than wrongdoing). These should be self-evident and the moral hazard is associated with the disappearance of these consequences, that Someone Else will rush to your rescue if you experience adversity or failure (not merely misbehave when warned not to do so).

By: GeorgeSorwell

GeorgeSorwell — Fri, 19 Sep 2008 18:55:25 +0000

Too big to fail should mean no executives getting millions of dollars in salary, bonuses and benefits.

By: roro80

roro80 — Fri, 19 Sep 2008 17:32:41 +0000

Oh, I also wanted to say: this whole idea of “free market” just doesn't work right unless it's actually a free market. I've been saying this for years with regard to the oil industry, every time someone says that the free market will take care of energy policy (when oil gets expensive enough — eh, you know the line). But that doesn't work when you give billions to big oil (or to Wall Street) in tax credits, bail outs, etc. The whole idea of a free market means that the government doesn't do that, and the free market will NEVER take care of energy or anything else if it continues. My point is not that I think a “truly” free market is the best way; instead, I'm merely pointing out how disengenuous it is to have conservatives scream “ah! socialism! boogy boogy!” whenever regulations or government encouragement for new projects is suggested by progressives.

By: roro80

roro80 — Fri, 19 Sep 2008 17:23:59 +0000

Love it, Elrod. Great article.