Rational Control and David Brooks

David Brooks uses his column to do a Q and A regarding the pending housing crisis:
Who’s to blame?

Who’s not to blame? The mortgage brokers were out of control. Regulators were asleep. Home buyers thought they were entitled to Corian counters and a two-story great room. Everybody from Norwegian town elders to financial geniuses decided that house prices would always go up. This was an episode of mass idiocy.

Why should the government do anything? Shouldn’t people be held responsible for their stupidity and greed?

Our economic system is based on the idea that people take responsibility for their own decisions. It would be ruinous if people felt free to take horrendous risks knowing that the government would bail them out if those decisions didn’t pan out.

Nonetheless, individual responsibility is not absolute. As behavioral economists demonstrate every day, human beings are powerfully and unconsciously influenced by the ideas and assumptions that float around in the social ether. If the financial elites misprice risk and offer delicious loans to consumers, then many of those consumers will end up grabbing the loans, the just and the unjust alike. We should at least see if there’s a way we can ease the pain those people are bound to suffer.

Besides, in case you haven’t been watching the Fed lately, we’re in the midst of a potentially disastrous financial crisis. People worry about moral hazard issues in normal times. But in times like these, they put those concerns on the back burner.
Is this wise? Is it really the job of the government to ease our pain? What do the other conservatives who read this think about Brooks' opinion? (My intuition says that Brooks' is quite wrong). He concludes his piece with a sort of might-makes-right argument that makes me think he is really reaching:
We do seem to have reached some Bernanke-era consensus. In normal times, the free market works well. But in a crisis like this one, few are willing to sit back and let the market find its own equilibrium.
(emphasis mine)

UPDATE: Prof. Robert Miller at First Things answers my questions:
To begin with, no one thinks that every problem should be solved by the free market, just as no one thinks that every problem should be solved by the government. Free marketers will tell you that government should intervene in the market for all kinds of reasons—e.g., to overcome collective action problems, to prevent free-riding, to provide public goods, etc. Traffic lights are a good example of this last. The freest of free marketers agree that the government should supply the traffic lights because the market can’t do so at a reasonable cost. For, if private parties built the traffic lights, charging for their use would be prohibitively costly (think toll booths at very corner), and so the cheapest solution is for the government to tax everyone, use the tax dollars to put up traffic lights, and let us all use them without paying an additional fee. So the issue in the Bear Stearns bailout is not whether the government is intervening in the market but whether the intervention is one that can be justified on classical economic grounds.
Check the whole post out here.

No comments: