Being a truly exciting guy, I’ve spent the last couple of days reading Robert Shiller’s The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It. It’s not exactly a page-turner. But it’s an interesting book.
Take bailouts. I have a deep and abiding distrust of them. In fact, I happen to live near Fannie Mae headquarters. And whenever out-of-town visitors have asked me what the enormous brick building is, I’ve always told them, “It’s a moral hazard.” (They don’t laugh either.) Nonetheless, Shiller convinced me — in a 60%, more-right-than-wrong kind of way — that bailing out banks and borrowers who’ve been clobbered might be the right the thing to do.
But today I encountered a more persuasive pitch for a bailout on the WSJ’s Real Time Economics blog. Former Fed Vice Chairman Alan Blinder was speaking at the annual econowonk confab in Jackson Hole, Wyoming, and offered a parable:
One day a little Dutch boy was walking home when he noticed a small leak in a dike that protected the people in the surrounding town. He started to stick his finger in the hole, but then he remembered his moral hazard lesson. “The companies that built this dike did a terrible job,” the boy said. “They don’t deserve a bailout. And doing that would just encourage more shoddy construction. Besides, the dumb people who live here should never have built their homes on a floodplain.” The boy continued on his way home. Before he arrived, the dike burst and everyone for miles around drowned, including the little Dutch boy.
Then Blinder offered an alternative narrative:
In this kindler, gentler version, the little Dutch boy, somewhat desperate and very worried about the horrors of the flood, stuck his finger in the dike and held it there until help arrived. … It was painful. The little Dutch boy would much rather have been somewhere else. But he did it anyway. And all the foolish people who live behind the dike were saved from the error of their ways.
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