Oops. Do over?

I like Megan McArdle’s analysis of the sub-prime bailout:

On a moral level, I’m with the latter group: people who qualify for the bailout are mostly people who really should have known better; they will now be bailed out mostly by people who did know better.

On a macroeconomic level, placing blame is somewhat counterproductive. Those who have sensible, fixed mortgages will not really be made happier if the credit crunch turns into a liquidity crisis, the economy plunges into a deep recession, and they lose their jobs, forcing them to default on their sensible, fixed mortgages.

I largely agree with this, and I say that as someone who has a fixed-rate mortgage taken out during the period included in the plan. Unfortunately, too much rests on the if in that last sentence. I don’t think this deal prevents the negatives as much as it delays them. And I worry about how much worse parts of the impending problem will be because we pretended as though we could make them go away by wishing hard enough.

In my opinion, a willingness to tolerate high levels of moral hazard–to give people second, and third, and eighth chances without inquiring too closely about how they got into so much trouble–is one of the great strengths of the American system. It makes us happier as people, and it lets our society make use of human capital that is too often left moldering in (metaphorical) debtor’s prison under the more punitive and moralistic regimes that prevail in the rest of the world.

Again, I agree with the larger view, as it pertains to our wisdom in permitting failure. It creates a dynamic ability to rebound. But rewarding the failed without demanding the necessary consequences of the failure only encourages the first, second, and seventh failures in the next foreseeable disaster.

One thought on “Oops. Do over?”

  1. Regarding the second blockquote – I’ve no problem with, as you put it, our permission of failure.
    But insofar as that permission of failure is predicated upon “high levels of moral hazard” I find it unacceptable. Permitting failure is fine, as long as we recognize it as failure, and that failures are made to bear the burdens of their decisions. High levels of moral hazard have nothing to do with tolerance of failure, learning from one’s mistakes, or rebounding from the gutter.

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