Bryan Caplan  

Fools and Their Money

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Arnold's just written some of the best sentences I've read in years:

In the mortgage market, people saw risk-takers outperforming prudent lenders. So they took more risks. There is no simple fix for that. For the foreseeable future, we can count on investors sticking to prudence when it comes to mortgage lending. We don't need any regulations to close that barn door.

But somewhere, some time, in some other market, there will be another outbreak of excessive risk-taking. You can't make the system idiot-proof. They'll just build a better idiot.

This is probably the most important pragmatic argument against paternalism. No matter how many laws you pass, there will always be high-risk investment strategies that happened to do well in the recent past. Foolish people who want to get rich quick will always be able to find these assets. Before long, the fools will be parted from their money. To make the whole economy revolve around their lack of foresight is just silly.


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COMMENTS (9 to date)
Tim Kane writes:

Please God, just one more bubble.

Have you seen that onion story? Too true.

Anittah Patrick writes:

Here, here. Such legislation would not only be silly, but it would increase transaction costs across the board thus punishing the non-idiots amongst us. Gross!

Gary Rogers writes:

Normally the fools and their money are separated when a downturn hits the economy and overlevereged positions have to be closed out. In a healthy economy, the prudent savers are then in a position to use their savings to invest in any liquidated assets and we go on from there.

When the government continues to stimulate for years on end, the prudent investors slowly lose their savings and only risky behavior remains. Soon we get to the place where we start defaulting on our mortgages. Unfortunately, continuing to stimulate the economy is not the right solution for this situation. If we do not allow fools to lose their money, we only end up with more fools. As scary as it sounds, the Fed needs to raise interest rates.

Lord writes:

I agree, but merely having some regulation in place that may obstruct the next recurrence until they re-examine and rethink why it was created in the first place and decide it is no longer needed may delay the next one.

dearieme writes:

There's no need for such regulation anyway. Just promise to hang any CEO who ruins his company. Disincentives matter.

dearieme writes:

PS If hanging seems a little extreme, force them to divorce, and marry women 20 years older than their present wives.

eccdogg writes:

"PS If hanging seems a little extreme, force them to divorce, and marry women 20 years older than their present wives. "

Forced a CEO to marry someone 10 years younger than them does not seem to be that big of a punishment

;)

Julia writes:

So idiots deserve to be punished. It just so happens that we have all been an idiot sometime.

Rithban writes:

"So idiots deserve to be punished. It just so happens that we have all been an idiot sometime."

I think the comments about creating positive law to punish CEOs was facetious; designed to get a chuckle.

However, idiotic action should not be divordced from the natural consequences of that action. It can be looked upon as "punishment", but I choose to see it as Nature's way of teaching us, "don't do that."

If we shield idiots from the consequences of their actions, they not only remain idiots, but they conclude that idiocy pays, breeding more idiocy.

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