It’s monetary policy, not a morality play

Here is my now-on-Sundays NYT column, on the recent subprime crisis.  Excerpt:

Nonetheless, Fed watchers should resist the tendency to put all
events into a simple or a morally plausible narrative. Monetary policy
is a largely technical subject, and its ups and downs don’t usually fit
into the kinds of emotion-laden stories that human beings apply to
daily life. The “us versus them” tag registers in human memory, but
monetary policy is not always or even usually about moral issues. As
Freud famously noted, sometimes a cigar is just a cigar.

market news, which is by nature unpredictable, suffers from distortion
when it is crammed into the form of a simple story. Unlike most
well-structured narratives, the zigs and zags of daily profit and loss
defy simple categorization in terms of moral precepts.

In the case of subprime mortgages, many investors did not foresee
the risk of collateralized debt securities. In response to this crisis,
the Fed has been trying to keep a steady hand and prevent a credit
crunch. We don’t yet know how well the Fed has succeeded, or how well
it could have done in the first place. And the storm has not yet fully

Of course, such an account of recent financial history
sounds mundane and offers less human conflict. It’s less like the
stories that people have gossiped about for thousands of years and thus
will have less traction, even if it is a better guide to monetary
policy issues.

Here is commentary from Mark Thoma; he believes I should embrace government bail-outs more, without moralizing against them or citing moral hazard so much. 

I might add that this desire to fit everything into a story lies behind recent blogosphere discussions of supply-side economics.  Many Democrats need a story of the following form: "The Republican Party makes decisions in a systematically worse way — much worse way — than do the Democrats."  (Otherwise they might be led to favor restrictions on state power, because Republican rule has not been pretty.)  While I don’t assign p = 0 to this possibility (e.g., Clinton did govern better than Bush has), I think most of the Democratic bloggers give it a far higher p than it deserves, and they retreat into moral strictures to "be more progressive" when faced with contrary evidence.  So a description like "the Republicans have complex motives, not all of which are noble, and end up making lots of mistakes" doesn’t, for them, sound different enough from the Democrats (whom they know) for comfort.


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