What to make of unintended consequences?

It's really difficult to do something right during a crisis. Opponents as well as those who speak in hindsight often come up with a million criticisms but it's a different matter at the instance a decision is made. Furthermore, the results are always debatable depending on one's econopolitical stance. A good example is how a lot of conservatives still claim FDR didn't help the economy during the Great Depression and some even claim that he made it worse, all speaking in hindsight of course, even though the reality of the situation was that GDP started growing almost as soon as he started his policies (check out the real GDP chart cited by Krugman.)

One of the problems faced by the Federal Reserve is what to do with the commercial paper market that has locked up. They decided to buy the highest quality commerical paper. Their actions related to, say, AIG or potentially GM/Ford/Chrysler, is nothing more than a bailout, but their actions in the commercial paper market is not really a bailout. The commercial paper actions are meant to minimize the impact of the financial crisis on the economy. Buying short-term commercial paper is not very risky for the taxpayer (unlike buying mortgage bonds or giving loans to failing financial institutions.) So, I'm supportive of their commercial paper strategy.

However, critics, especially American Libertarians such as Jim Grant, always argue that the problem with government intervention is that there are unintended consequences.

You are seeing an unintended consequence develop in the commercial paper market. The government decided to only buy high-quality paper. But this has placed the lower quality issuers at a huge disadvantage. Lower quality issurers like Honda, Texatron, Home Depot, Dow Chemical, and Nissan, are now claiming that they also should get access to the government program as well.

It's a tough situation for the government. Do you expand the program and take on taxpayer risk (not to mention the possibility of the system being arbitraged by profit-seekers)? Or do you just limit it to the A-1/P-1 paper which means you are practicing an unfair system?

This is an example of an unintended consequence. I'm sure no one thought of Dow Chemical being put at a disadvantage compared to, say, G.E. (GE is a high quality issuer). I'm still in favour of the program but policymakers need to be cognizant of these side-effects. I think they should expand the program or give a firm date for the closure of the program (closing the program will likely put a lot of stress on non-financial companies.)