the economist goes krugman
I’ve often opined (as has the WSJ’s James Taranto) that economist-turned crackpot and former Enron adviser Paul Krugman would do well to read his own economics textbooks. Seems that the Economist itself has gone insane during the latest mortgage crisis and backed government intervention for a problem created by…government intervention.
…But banks play a key role in oiling the system; they provide the credit that lets the rest of us do business. They also have innate risk, because they lend more money then they have cash in hand. To put it another way, they borrow short and lend long. This has made them the subject of panics throughout history, and those panics have always led to economic turbulence. The authorities can let them go bust, but the risk is depression. Or they can hold their noses and bail them out.
…
And there will be more crises in future. Now that investment banks are part of commercial banks, we have returned to the risks that characterised the system before the Glass-Steagall Act of 1933—specifically, that reckless investment banks can fritter away retail depositors’ money. And what will we have to do if that happens? Bail them out again.
Wow. Not one word about changing government encouragement (expanded during both the Clinton and Bush administrations) of lenders to take on riskier mortgages that led to this in the first place. And the article completely ignores that it’s the repeal of Glass-Steagall (which has allowed investment and commercial banks to consolidate) that enabled organizations like Bank of America to take over failing banks. And what’s more, it’s the Wall Street Journal (whose opinion page has otherwise backed the bailout—unsurprising, given its clientele) that has to give us a lecture on moral hazard.
I was not surprised when the Economist turned around and opposed the Iraq War. Its initial support (while welcome to this writer) was arguably against its roots in the writings of John Stewart Mills. But one expects the journal to at least adhere to the principles of, y’know, economics. So much for that.