"The truth is rarely pure and never simple." - Oscar Wilde

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"How much of the various commentators' feelings arise from their sense of what is most economically effective, versus their sense of moral desert (in the sense of what a person or corporation "deserves")? I ask this because it strikes me that there is a very strong philosophical sense among Singaporeans (and among many on the right wing of economics generally) that people have to pay penance for wrongdoing, and that therefore punishment has to be meted out, and this morality creeps into our economics, occasionally pushing out pragmatism. I wonder whether sometimes we're so afraid of inducing moral hazard we go towards supporting other extremes, where there is no risk pooling, no risk sharing. It's the equivalent of seeing a man set himself on fire and arguing that if we rescue him and put out the fire, it will only encourage people to set themselves on fire. There's also a question of the scale of "punishment": even if a company fails, does that mean it has to be condemned utterly and immediately?

Take for one the auto "bailout", which people seem in a rush to shake their tut-tutting fingers at. Richard Posner in response to Gary Becker makes a good point on their joint blog (http://www.becker-posner-blog.com/archives/2008/11/bail_out_the_de.html): even if Detroit really does make bad vehicles that people don't want to buy, that doesn't necessarily mean right now, in the heart of a recession/depression, is the best time for the American economy for Detroit carmakers to file for Chapter 13, since it could lead to a lot greater economic turmoil thanks to uncertainty and panic. There's a middle ground between "too big to fail" and "let them fail right away", and I would argue you don't have to be a protectionist to think that even in economic terms there's a case to be made for stabilising the automakers right now. Indeed, you could argue that an overly strong desire to avoid moral hazard and to stick to market principles led to letting Lehman fail overnight, with the ensuing market panic and withdrawal of credit, which perhaps a more orderly system might have mitigated, if not avoided.

As Delong pointed out in his talk a couple of weeks back, why is government intervention in the world of money and finance different from other industries? In the end, what matters is the impact on economic output and unemployment rates. Why do we value the orderly functioning of the financial system? Not because we want to see a nice shiny financial system but because this leads to credit, and then the ability to create output and jobs. You have to make the similar calculations when you weigh the intervention in the auto industry, I think, rather than just carve out finance as a magical exception.

Don't get me wrong - I think American carmakers have made some pretty terrible cars, and the environment has often paid the price for that. But in our desire to see wrongdoers get punished, we should watch out for moments when we're curing dandruff by decapitation (or, depending on your assessment of the state of American automakers, curing cancer by assassination)."