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Shorter Megan McArdle: Trying to punish the financial industry for its "mistakes" will create another Depression.

Longer Version:

The things that fix economic crises are not always intuitive. As Brad De Long himself once remarked to me, it is nearly impossible to bail out the financial system without also bailing out people who are long assets--aka financiers and rich people. But oh, how that flies in the face of our intuitions! It should be true that the most prosperous system is the one which severely punishes everyone who didn't monitor the soundness of their investments. We feel, very deeply, that financial and economic efficiency should mirror our intuitive sense of justice. And probably it does, mostly, when you're living in a hunter gatherer tribe.

But in a complex world where mistakes are easy and detecting them is not, I just don't think this holds truet. The "just world" described above is not some bourgeois paradise; it is the western world during the Great Depression. It was not a better world for everybody; it wasn't even a better world for anybody that I can think of. After it had finished punishing people who made stupid decisions, it went on to wreak brutal vengeance on a lot of people who had been quietly minding their own business. Bank runs can afflict the soundest banks, if depositors panic.

Those poor bankers and their mistakes! Where is liberals' sense of fairness when it comes to them?!?

One can name dozens of examples of things that violate our sense of fairness and obligation, and thereby make us all richer, from limited liability to bankruptcy.  But people most won't believe it.  Oh, they may believe the part of it that supports some larger "fairness" agenda they're committed to.  But their support is almost always piecemeal: try getting a liberal who loves easy bankruptcy to give a second chance to bankers who made a few stupid money decisions, or convincing conservatives who are avid for tort reform that debtors who ran up credit cards with unwise investments in expensive but rapidly depreciating motor vehicles and consumer electronics might also need legal protection from the fullest extent of their past mistakes.

Like Cassandra, McArdle has been a lone voice in the wilderness, warning both erring sides from the all-seeing, all-knowing, perfectly balanced middle. Greedy consumers and a "few stupid money decisions" created this crises, not deliberate acts of fraud and malfeasance, and a wise realist and impartial observer like McArdle can only shake her head, press her little hand to her forehead, and sigh at the incivility that surrounds her.

You can try to explain to all of them why their sense of outrage is rather beside the point in the face of a looming financial explosion which is going to make everyone much worse off if it reaches critical mass. You can also go home and try to explain this to your microwave, for all the good it will do. As anyone who has ever spoken to a five year old knows, the sense of fairness is one of the most primal and intractable cognitive instincts we have. In the best of times, it takes years to change public opinion about what is fair. These are not the best of times, and we do not have years.


In the years that I have been doing just that, it has been a losing battle on most fronts. Especially as regards the financial crisis, where the reaction is usually that I am either a worthless dupe, or a paid shill, for the banking industry.

 
A person can be both. Let's not underestimate our elite.
 

The people on the right who can explain it all in terms of moral hazard, and the people on the left who can explain it all in terms of insufficient regulation/punishment of bankers, can wrap economic and moral theory up in a neat package that claims to deliver justice and prosperity. All I've got to offer is messy tradeoffs.
 


I am very much afraid that the euro zone is about to plunge us into phase two of the global financial crisis--and that as with the Great Depression, phase two may be even worse than the dismal years we've just endured.    In search of fairness, we may all get a lot more justice than any of us really wants.

As we are all suffering, let's not worry about things like justice and fairness. That way leads to ruin.