tag:blogger.com,1999:blog-5404820640426099135.post3070648945795353998..comments2023-10-31T00:46:35.316+13:00Comments on Anti-Dismal: Boettke v. Cowen (updated)Paul Walkerhttp://www.blogger.com/profile/13731003529546075700noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-5404820640426099135.post-26568317668095598032009-08-31T09:12:20.309+12:002009-08-31T09:12:20.309+12:00But that is my point. Not bailing out the banks wo...But that <i>is</i> my point. Not bailing out the banks would not have made much difference to the suffering of management. If lack of negative consequences to bank management is really distressing economists, then I think they should be advocating market reforms (like that found <a href="http://isuffrage.org/" rel="nofollow">here</a>) which give investors (who ARE suffering) real control over their employees.Markhttps://www.blogger.com/profile/10234500025574503220noreply@blogger.comtag:blogger.com,1999:blog-5404820640426099135.post-91988054020268538132009-08-28T15:53:31.321+12:002009-08-28T15:53:31.321+12:00Mark. I take your point but I think most economis...Mark. I take your point but I think most economist are worried by the effect of the bailout on the probability of bad future behaviour. If the bank's management don't suffer (for whatever reason) then bad decisions are not punished and thus we will get more bad behaviour in the future.Paul Walkerhttps://www.blogger.com/profile/13731003529546075700noreply@blogger.comtag:blogger.com,1999:blog-5404820640426099135.post-50710928933075055372009-08-28T15:45:44.659+12:002009-08-28T15:45:44.659+12:00Thanks Paul.
My argument is that the moral hazard...Thanks Paul.<br /><br />My argument is that the moral hazard created is almost negligible because:<br /><br />a) the downside cost to the managers is small. As, their employer's collapse, their unemployment probability remains very low (I was in London when JP Morgan collapsed and the word on the street was that many of their top guys were being head-hunted even before they'd been made redundant)<br /><br />b) the risk-reward ratio is very uneven. Massive bonuses when it doesn't go pear-shaped more than compensate for as few months' unemployment every 10 years.<br /><br />If I was a top investment banker and firmly convinced that my bank would NOT be bailed out in the event of failure, I'd still act the same way in the face of a similar bubble (assuming I was both rational and amoral). The possibility that my bank could get bailed out really would have little impact.Markhttps://www.blogger.com/profile/10234500025574503220noreply@blogger.comtag:blogger.com,1999:blog-5404820640426099135.post-12000910219224047002009-08-28T14:40:54.239+12:002009-08-28T14:40:54.239+12:00Mark: My quick reply is that without the bailout s...Mark: My quick reply is that without the bailout some banks would have gone under imposing costs on the management of those banks, eg unemployment. Due to the bailout the management of banks now know they will not face such costs in the future because if they stuff up again they will be bailed out, again. Thus they are more likely to take risks that they otherwise would not take. Which makes the probability of needing a bailout that much greater. This is the moral hazard issue.Paul Walkerhttps://www.blogger.com/profile/13731003529546075700noreply@blogger.comtag:blogger.com,1999:blog-5404820640426099135.post-19558984887097983702009-08-28T08:37:05.755+12:002009-08-28T08:37:05.755+12:00The bailouts were not a good idea, just think of t...<i>The bailouts were not a good idea, just think of the moral hazard problem this has created</i><br /><br />Maybe you can explain this. While I don't necessarily think the bailouts were a good idea, I don't follow the argument that it created a moral hazard.<br /><br />My (limited) understanding of the moral hazard argument is that by shielding a party from the negative consequences of their actions, you affect their behaviour. <br /><br />I just fail to see how the bank bailout achieved this, unless you:<br /><br /> a) take the line that the banks themselves and not the individuals running them, are the key parties in question<br /><br />or<br /><br /> b) equate the bailout with not prosecuting corporate malfeasance <br /><br />It's individuals who make the decisions and operate the banks. They had already collected their bonuses. Their main downside risk in many cases was a little moral opprobrium (which is probably worse due to the bailout), a year or two without a decent bonus and maybe the need to go job hunting (although it seems there were plenty of cases of top guys just taking a signing bonus to move to a still-solvent bank).<br /><br />It appears to me that the moral hazard was always there in the way banks' top executives and dealers are remunerated. Bailing out banks to save our financial system (if it did that) doesn't change this.Markhttps://www.blogger.com/profile/10234500025574503220noreply@blogger.comtag:blogger.com,1999:blog-5404820640426099135.post-54335483022336940292009-08-27T21:37:09.751+12:002009-08-27T21:37:09.751+12:00I'm not sure the issue is fractional reserve b...I'm not sure the issue is fractional reserve banking, after all you can have free banking and fractional reserve banking together. I think the issue is to do with having a Central Bank.<br /><br />As Peter Boettke <a href="http://austrianeconomists.typepad.com/weblog/2009/08/can-i-bring-myself-to-utter-those-words.html" rel="nofollow">writes</a><br /><br />"In the world of Central Banks, the policy analysis cannot be pursued as if we were existing in an ideal free banking system where decentralized banks could respond to market signals to adjust money supply to meet money demand in the most effective way possible. Instead, central bank monetary policy relies on clunky and inefficient mechanisms to try to accomplish this task of matching money supply with money demand. In this central banking world, it is much more difficult to distinguish between "good" deflation and "bad" deflation. A "good" deflation corresponds to declining prices due to productivity increases, a "bad" deflation corresponds to falling prices that can be attributed to mismanagement of money supply relative to money demand. It is the "bad" deflation that causes fear due to its association with a cummulative rot theory of economic crises."<br /><br />and later<br /><br />"Steve Horwitz and Bill Woolsey have repeatedly argued on this blog about the fine points in monetary theory associated with central bank policy, and admitted that in such a world quantitative easing of some sort or another might make sense at various times."<br /><br />In a world with Central Banks, other bank may well fall victim to the "clunky and inefficient mechanisms". In a world of bad deflation CB action could help prevent Horwitz's "economically unjustified, bank failures".Paul Walkerhttps://www.blogger.com/profile/13731003529546075700noreply@blogger.comtag:blogger.com,1999:blog-5404820640426099135.post-71443926747364362232009-08-27T21:03:13.553+12:002009-08-27T21:03:13.553+12:00Paul,
I would say that a decrease in the money su...Paul, <br />I would say that a decrease in the money supply which subsequently caused a bank failure would *be* a case of an economically justifiable bank failure. Banks grow (and continued to operate) following a model (i.e. fractional reserve banking) which would one day result in their demise. Is this not an example of their chickens coming home to roost? Why would we/you wish to impede banks facing the consequences of their decisions?<br /><br />JulianJuliannoreply@blogger.comtag:blogger.com,1999:blog-5404820640426099135.post-71307284320221843362009-08-27T20:36:28.488+12:002009-08-27T20:36:28.488+12:00Julian. The basic argument is that in the Steve Ho...Julian. The basic argument is that in the Steve Horwitz quote:<br /><br />"Banks should have been allowed to fail if they made bad investments. Adding reserves into the system to prevent the money supply from falling and leading to more, economically unjustified, bank failures is a different matter."<br /><br />So it would depend on the effects of the reduction in the money supply.Paul Walkerhttps://www.blogger.com/profile/13731003529546075700noreply@blogger.comtag:blogger.com,1999:blog-5404820640426099135.post-51161702773124569692009-08-27T20:07:33.778+12:002009-08-27T20:07:33.778+12:00Paul
You state "...there may have been more ...Paul<br /><br />You state "...there may have been more justification for the Fed acting to prevent the money supply from falling."<br /><br />I struggle to see what justification there could be. Why was/is it necessary to see the money supply fall? The decrease in money supply was reflecting the loss of fiduciary media, the part of the money supply which grew rapidly in the past decade and drove significant malinvestment. Why attempt to replace the loss of fiduciary media?<br /><br />JulianJuliannoreply@blogger.com