Atlas Shrugged: The Mocking

Thursday, November 10, 2011


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.


Ufotofu9 said...

McCardlesque opening:
"When I was a young and naive economics writer, I used to write about developing countries a fair amount."

ifthethunderdontgetya™³²®© said...

"Moral hazards are a problem for little people."

That's our problem today. It'd be fixed quickly with jail time for some prominent (and deserving) plutocrats.

Susan of Texas said...

Why should anyone who just made a "mistake" go to jail? They should be rewarded because we learn through failure and bankers are all much smarter (and richer) now!

CMike said...

More outrageous than anything Megan McArdle wrote in that post is what she passes along from confirmed neo-liberal and progblog star Brad DeLong who writes:

>>>>>The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip.

The Federal Reserve Needs to do so now.<<<<<

What outrages me about that? Well it's not that DeLong failed to call for the Fed to rescue MF Global and Jon Corzine's prestige.

Rather, it is, as our rugged individualist banking ventures are about to go down for the count yet again, DeLong left out the part where he recommends that, upon showing up with the smelling salts and cash transfusions this time, the Fed will being doing so only on the condition that everything from the stock equity down to the parking lot proceeds of "every single American financial institution" availing themselves of this round of bailouts are to become the property of the United States Treasury. And that Jamie Dimon and Lloyd Blankfein be made eligible to start receiving unemployment benefits.

Kathy said...

Fascinating article on the Iceland bankruptcy & default.

BDR said...

I especially like that The Atlantic makes me sit through a fifteen second commercial to *get* to McArdle. Fine metaphors abound.

brad said...

Does anyone know any small cults or escapist mini-societies which live in large underground caves with abundant water and mineral supplies and geothermal energy plants I can run away to?
I'm at the point where I want Megan to live a long time and suffer in the world the people she's cheerleading for are creating, the problem is I and everyone I care about will be in it too.
Not to mention billions of others.
I wish some brilliant neurochemist would invent some sort of drug that forces the development of a conscience which we could mix in the world's supplies of ambien, cocaine, and viagra.

Kathy said...

The Stone That Never Came Down by John Brunner is a fictional example of such a drug, a virus I think.

"...describes a dystopia in which poverty, inflation, unemployment, and disillusionment are rampant around the world, and WW III seems just around the corner. And, to make matters worse, is the members of a right-wing political/religious group, "The Campaign Against Moral Pollution" (Godheads) ... a mysterious new drug known as VC is given to one person, who spreads it around (via blood donations) ... the drug drastically increases the individual's natural empathy, and grants total and complete access to one's memory. After being infected, a person's automatic filters and prejudices are dismantled...The novel describes how this change effects numerous individuals, and ends at kind of a 'dawning of a new age for mankind'."

Lurking Canadian said...

CMike has it exactly right. If it is necessary for the public purse to bail out financial institutions to prevent catastrophe, then we hold our noses and do it.

That's why we have governments.

But if you have to do that, it means the people in charge screwed up by the numbers. So you imprison the ones who broke laws, fire the ones who just made bad decisions, and put new regulations in place to make sure the shenanigans don't happen again.

What you don't do is give the miscreants the key to the vault and turn your back.

Of course, that's exactly what Megan, who I'm sure still favors harsh treatment of strategic mortgage defaulters, wants us to do for her banker friends.

Ken Houghton said...

"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."

Huh? Can someone who knows anything about economics or history please translate that into English?

We have to take "a lot of people who had been quietly minding their own business" as meaning the depositors who had given banks money, which was then used unwisely (as the Knight from the final Indiana Jones movie says*).

So the banks moved into a state of major liabilities and negative equity; that is, Assets LT Liabilities. And those liabilities were the depositors, who realized that "the soundest banks" is a horseshit lie (that's a technical term, btw) and decided (correctly) that their mattress was a better place to hide whatever savings they had than Multiple Mr. Potter's unnamed banks.

So they went to their banks to get those bank liabilities (their assets). Since all they had done until then was "mind their own business."

It appears McMegan is trying to cast the depositors as evil. In the venal or stupid discussion, "both" is the only possible answer.

*No, Kingdom of the Crystal Skull does not exist. I don't care if you were stupid enough to pay $10, more or less, to see it.

Kathy said...

I was pretty saddened by the "crystal skull" garbage.

If "they" wanted to continue the Indiana Jones series with a new Indiana, they ought to have gone with a woman, his daughter, perhaps by... the hard drinkin' lady in the first movie.

Deep sigh.

David said...

I was surprised that McArdle is quoting Brad DeLong, who had repeatedly ridiculed McArdle for the vastness of her ignorance and stupidity.
For example,