Bryan Caplan  

Mankiw, Tyler, and Me

How Banking Panics Worked Befo... The No-Bailout Option...

Mankiw has some wise observations on the GSE takeover. Here's a particularly excellent parethetical:

(And before anyone emails me that the GSE equity holders are not exactly getting a good deal here, let me point out that the debt holders are. In a capitalist system, you want those extending both debt and equity finance to bear the consequences of the risks they undertake. If the taxpayer is chipping in, someone is being insulated from risk.)
Mankiw's calm is in sharp contrast to my colleage Tyler Cowen's hyperbole. Normally, I'd expect Tyler to say something like, "There's a 3% chance of a melt-down if we do nothing, and that's enough to justify a bail-out." But instead, he confidently equates doing nothing with disaster. I wonder what odds he'd give me in a conditional bet? Based on his statement, doesn't it seems fair for me to demand 10:1?

My own view: As usual, Herbert Spencer got it right: "The ultimate result of shielding men from the effects of folly, is to fill the world with fools." The U.S. has just missed a golden opportunity to credibly signal to the world for decades to come that "no guarantee" means "no guarantee." I've previously argued that economists underrate the death penalty because they aren't factoring in availability bias. I think they're underrating a "Just say no to bail-outs" policy for the same reason.

Comments and Sharing

COMMENTS (7 to date)
bgc writes:

The statistical evidence strongly suggests that the death penalty deters murder to a significant extent:

mt writes:
Charlie writes:

If you're right, then I guess we shouldn't expect policy change, since the same bias will cause us to overrate the probability of disaster without a bail out.

E. Barandiaran writes:

I have been checking the latest list of Obama rumors but I could not confirm that he has taken over Marginal Revolution. Until further notice don't trust anyone claiming to be TC or AT.

Tyler Cowen writes:

The bottom line is that Mankiw favors the bail-out too (and I agree with his words as well), for more or less the same reasons that I do.

Alex J. writes:

Parethetical? It's not in or, or in the spell checker for that matter.

hugo writes:

About “McCain's Likely Tax Policy” on Mankiw's blog

Ok, if we assume P(tax hike|McCain) is 0.74 and P(tax hike|Obama) is closer to 1 then what are the values of E(tax hike|McCain) and E(tax hike|Obama)?
That answer is much more important, does not it?

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