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He seems to be saying that if we had known what was going to happen before it happened, we would have been able to prevent it from happening. Well, maybe. But

He seems to be saying that if we had known what was going to happen before it happened, we would have been able to prevent it from happening. Well, maybe. But isn't that like saying "if the French had defended the Ardennes, they would have stayed in the war much longer"? That seems like a reasonable guess (as does "rescuing Lehman could have taken the bite out of the Great Recession") but I would say that, actually, no one knows what would have happened in these imaginary scenarios. The broader point here is that events like Lehman's collapse and its aftermath (or the invasion of France) are essentially defined by their unpredictability. If we could predict them, they wouldn't even be events. And even if, somehow, these events were predictable, does anyone really think that economists have some theory that lets them make decisions like "who to bail out" or answer questions like "what will the consequences will be if they don't bail X out?" I believe that economists make better calls than a man on the street (me), but I have my doubts.

roenxi 7y ago
> The broader point here is that events like Lehman's collapse and its aftermath (or the invasion of France) are essentially defined by their unpredictability. Unpredictability is a dangerous word because it has two meanings here. On the one hand, you are using it to mean nobody could possibly know ahead of time that it would be Lehman and even if they were told that fact it would still have been impossible to pick the date (or the year for that matter). Nobody could argue. On the other hand, billions to trillions of dollars of wealth that everyone thought existed turned out not to be there. It didn't disappear; it was discovered in the financial crisis that it never existed and the crisis was when that fact became uncontroversial in the mind of the general money manager. That part was clearly predictable in an emperor-has-no-clothes fashion and probably years in advance as well. It seems highly likely that if the people with power didn't see it shaping up then they were choosing not to see. Much like government debt-to-GDP in today's article. The people profiting cheer-lead bad long term decisions and everyone else sits quiet hoping that they won't have to pay for it. Which would be fine if the responsible people were made to pay in the end, but 2008 showed that not to be the case; taxpayers stepped in. The financial bloodbath was not matched by an equal sack-everyone-involved-and-bankrupt-the-investment-banks bloodbath of sufficient magnitude. A failure like that should have reamed out the entire sector; if they weren't ready for it replace them with new blood and ideas. I suppose the point I want to make is that there is a frame here that 'saving Lehman' would have been a win. It wouldn't be a win. They were complicit in mis-allocating resources; 'saving' them just gives them more time to redirect real effort into bad causes, and makes the final reckoning more painful when people need to call on real resources that turn out not to be there. The books were misleading; protecting them would just have let more people make bad decisions based on misleading figures. Markets work best when people don't do that, and I understate by an order of magnitude or two when I say that.
- leftyted 7y ago
  > On the other hand, billions to trillions of dollars of wealth that everyone thought existed turned out not to be there. It didn't disappear; it was discovered in the financial crisis that it never existed and the crisis was when that fact became uncontroversial in the mind of the general money manager. > That part was clearly predictable in an emperor-has-no-clothes fashion and probably years in advance as well. It seems highly likely that if the people with power didn't see it shaping up then they were choosing not to see. I don't think it was predictable in any useful sense. First, I don't think anyone knew that (or when) "the general money manager" would "become aware of the facts". Second, I don't think anyone knew that would happen if they became aware of the facts. So maybe it was predictable in a "there will definitely be a recession...sometime" sense, but that's not helpful. Even if some people did identify "billions to trillions of missing wealth" and predict the crisis (and apparently some people did), there wasn't any way to know which of those predictions was correct. There is no one who predicts things who is always right and there is no agreed-upon theory to tell us when these things are going to happen before they happen with any precision. To put it another way: there are smart people who predict financial crises that never happen all the time. > I suppose the point I want to make is that there is a frame here that 'saving Lehman' would have been a win. It wouldn't be a win. They were complicit in mis-allocating resources; 'saving' them just gives them more time to redirect real effort into bad causes, and makes the final reckoning more painful when people need to call on real resources that turn out not to be there. The books were misleading; protecting them would just have let more people make bad decisions based on misleading figures. Markets work best when people don't do that, and I understate by an order of magnitude or two when I say that. This is a different argument. I guess there are two things to worry about: 1. Making the responsible parties pay for their malfeasance (justice) 2. Making decisions that will benefit the economy (pragmatism) It's entirely possible that bailouts ticked the second box but not the first. But, as you argue, in the long run, not bailing out the lenders might tick both boxes because it will teach them a lesson. However, that's a hard sell for Americans living between 2008 and 2012, who probably did benefit from the bailouts, even if they were unjust and even those bailouts only deferred some larger, inevitable crisis. I don't envy the people who have to make these decisions.

roenxi 7y ago

> The broader point here is that events like Lehman's collapse and its aftermath (or the invasion of France) are essentially defined by their unpredictability. Unpredictability is a dangerous word because it has two meanings here. On the one hand, you are using it to mean nobody could possibly know ahead of time that it would be Lehman and even if they were told that fact it would still have been impossible to pick the date (or the year for that matter). Nobody could argue. On the other hand, billions to trillions of dollars of wealth that everyone thought existed turned out not to be there. It didn't disappear; it was discovered in the financial crisis that it never existed and the crisis was when that fact became uncontroversial in the mind of the general money manager. That part was clearly predictable in an emperor-has-no-clothes fashion and probably years in advance as well. It seems highly likely that if the people with power didn't see it shaping up then they were choosing not to see. Much like government debt-to-GDP in today's article. The people profiting cheer-lead bad long term decisions and everyone else sits quiet hoping that they won't have to pay for it. Which would be fine if the responsible people were made to pay in the end, but 2008 showed that not to be the case; taxpayers stepped in. The financial bloodbath was not matched by an equal sack-everyone-involved-and-bankrupt-the-investment-banks bloodbath of sufficient magnitude. A failure like that should have reamed out the entire sector; if they weren't ready for it replace them with new blood and ideas. I suppose the point I want to make is that there is a frame here that 'saving Lehman' would have been a win. It wouldn't be a win. They were complicit in mis-allocating resources; 'saving' them just gives them more time to redirect real effort into bad causes, and makes the final reckoning more painful when people need to call on real resources that turn out not to be there. The books were misleading; protecting them would just have let more people make bad decisions based on misleading figures. Markets work best when people don't do that, and I understate by an order of magnitude or two when I say that.

leftyted 7y ago
> On the other hand, billions to trillions of dollars of wealth that everyone thought existed turned out not to be there. It didn't disappear; it was discovered in the financial crisis that it never existed and the crisis was when that fact became uncontroversial in the mind of the general money manager. > That part was clearly predictable in an emperor-has-no-clothes fashion and probably years in advance as well. It seems highly likely that if the people with power didn't see it shaping up then they were choosing not to see. I don't think it was predictable in any useful sense. First, I don't think anyone knew that (or when) "the general money manager" would "become aware of the facts". Second, I don't think anyone knew that would happen if they became aware of the facts. So maybe it was predictable in a "there will definitely be a recession...sometime" sense, but that's not helpful. Even if some people did identify "billions to trillions of missing wealth" and predict the crisis (and apparently some people did), there wasn't any way to know which of those predictions was correct. There is no one who predicts things who is always right and there is no agreed-upon theory to tell us when these things are going to happen before they happen with any precision. To put it another way: there are smart people who predict financial crises that never happen all the time. > I suppose the point I want to make is that there is a frame here that 'saving Lehman' would have been a win. It wouldn't be a win. They were complicit in mis-allocating resources; 'saving' them just gives them more time to redirect real effort into bad causes, and makes the final reckoning more painful when people need to call on real resources that turn out not to be there. The books were misleading; protecting them would just have let more people make bad decisions based on misleading figures. Markets work best when people don't do that, and I understate by an order of magnitude or two when I say that. This is a different argument. I guess there are two things to worry about: 1. Making the responsible parties pay for their malfeasance (justice) 2. Making decisions that will benefit the economy (pragmatism) It's entirely possible that bailouts ticked the second box but not the first. But, as you argue, in the long run, not bailing out the lenders might tick both boxes because it will teach them a lesson. However, that's a hard sell for Americans living between 2008 and 2012, who probably did benefit from the bailouts, even if they were unjust and even those bailouts only deferred some larger, inevitable crisis. I don't envy the people who have to make these decisions.