Thursday, November 20, 2008

"But the international-based capital regulations opened loopholes that banks could drive a truck through. "

Arnold Kling also read the paper by Brunnermeier, so read his analysis, which is interesting as always. Here's a comment I really like:

"My opinion continues to be that you cannot prop up until you clean up. The first order or business is to shut down the weakest institutions. Only then should you look around and decide about capital injections and bailouts. We don't need a chief rescuer. We need a head janitor. Think of the financial sector as a bunch of dishes sitting on shelves during an earthquake. Bernanke and Paulson are running around trying to hold the shelves in place. I think we would be better off letting a lot of the dishes fall and then tossing them into the trash. You can understand why my view could be unpopular, and it also could be wrong. But so far, the stock market isn't telling me that Bernanke and Paulson are right."

Now, I understand that, at some point, we have to do this. My rationale for supporting a Swedish Type Plan was for the government to take over these banks, and either kill them, or refit them for private service. I still believe that this plan would have been cleaner in a whole, by now obvious, number of ways.

However, now we are dealing with Bagehot on steroids, as I think Bob McTeer said. In terms of Political Economy, we have a new administration coming in. So, I can see Kling's point as the goal, but I simply think that, in terms of Politics and Political Economy, it's going to continue to be a very messy cleanup. I include the auto makers in this.

Please remember that, for me, we are mainly combating fear and aversion to risk, and so we will have to make concessions to the realities of taking on these powerful forces, and understand that sensible economic and political points might have to be breached in order to get through this. None of this means that we change our basic understandings of economics and politics, which, for any libertarian, means a focus on individual liberty.

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