This is what Alan Blinder has to say about Senator Barney Frank's and Senator Chris Dodd's plan to deal with the mortgage crisis in The New York Times.
This is my favorite comment from Alan:
But it must not be too generous in shielding people and businesses from the consequences of their own bad decisions both for economic reasons (to minimize moral hazard) and for political reasons (to gain voter support).
This is my response to Alan:
Oh give me a break will yah!!!
When politicians have access to these sorts of institutions they will always succumb to the idea of security, because when people hear that word it makes people blush or drives them crazy. I mean crazy as in happy crazy!
In bureaucracies there is no such thing as a cap on spending because to get votes politicians will give gifts. Remember that Christmas tree on Hillary Clinton's website laying out all of the "gifts" she will give to America if elected president? In bureaucracies there is no such thing as keeping moral hazard to a minimum because there will always be a politician willing to bail people out of their mistakes to get their vote or the vote from sympathizers. That vote is an incentive for politicians to act recklessly.
Because that incentive for politicians is always there, one of them will come around and use that political tool.
Another favorite comment from Alan:
Their design is not flawless. But do you know of any perfect solutions? It deserves our support.
This is my second response to Alan:
Do all market failures require governments to step in and fix things? Not exactly! When people take too much risk and hurt themselves they must learn from their mistakes, not be encouraged to do it again. They need an incentive to act with their brain, not impulse, when making decisions that can affect their lives.
If moral hazard is an issue with private insurance companies, which it largely is, it will be a greater issue for a government insurance company.
This is just another silly project that will crowd-out investment after it borrows another couple of hundred billion from overseas, thus curbing potential output.
Thanks to Professor Greg Mankiw for his post!
©2008 Jeff Peters, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Sunday, March 30, 2008
Last modified: Sunday, March 30, 2008
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