Tuesday, September 23, 2008

Who is to blame for the financial crisis?

We're starting to here more and more calls to punish those who headed the private sector organizations that the politicians in Washington now say we have to bail out.

But here's the irony: the people in government who were responsible for the policies that brought this about are looking to punish the people in the private sector who were doing what these policymakers made it rational for them to do. The people who created the incentives for the heads of private sector companies to act as they did are now calling for the heads of these same people for doing what they gave them the incentive to do.

But the people who set the policies that caused the current financial crisis are at least as responsible as those in the private sector who acted on them. Why should we have a worse opinion of those who acted rationally in an irrational economic world than of those who created the irrational world in which such actions were rational?

Is it reasonable to trust, in a time of crisis when stakes are high, those who did exactly the wrong thing in better times when the stakes were not as high? They are people who got the diagnosis and prognosis wrong. Now we're supposed to trust them on the prescription.

Go figure.

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