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.)


  1. What US-focused commentators usually ignore is the experience of other countries in the Depression era. Simply put, the sooner the gold standard was abandoned by a country and the bigger the government stimulus the quicker the Depression ended. The point is well made by Germany which despite being one of the hardest hit initially was back at full employment c. 1936 and actually suffered a severely overheating economy thereafter.

    As Krugman recently noted on his blog, Roosevelt was probably far to timid in his measures, only the massive stimulus of WWII military spending finally broke the back of the Depression in the US.

    The modern Mellonists seem determined to repeat the idiocy of their predecessors by refusing to act to stabilizize things.

    (note that I am mostly on the political right, but some of the current economic commentary on the US right is in my view horribly ignorant of history)

  2. Wow, you are on the right? Never would have thought. That would make me your opponent ;) Are you conservative on social issues (like abortion, drugs, etc)?

    You are right in saying that many on the right are basically in the 'liquidationist' camp. It's kind of ironic in the United States though. These were mostly the same guys who were tripping over themselves for the policies of the George Bush administration, including spending huge sums on a bogus war, but now that we actually have a crisis, are reluctant to spend.

  3. I'm Dutch, we think of people who disagree with us as potential coalition partners, not opponents ;)

    The political right, like the left, comes in a variety of shapes and sizes, so let me clarify my position.

    I am what is known here as "liberal-conservative", ie. the proper kind of liberal instead of the US variant that is FUBAR.

    I consider personal freedom very important and prefer that the government would do the minimum necessary. That is already a lot, the government is necessarily responsible for internal and external security, should balance potential abuses of power by the rich and powerful and should ensure access to education.

    I also see a role for government in organising universal insurance for such things as health care, disability and uemployment.

    You will have noticed that the above activities will result in a big government already.

    What I do not want the government to be messing with is trying to run any business, or regulating what I can say, eat or drink or if I can own a weapon.

    I am thus not conservative in the US sense on drugs or abortion as I see both primarily as the personal responsibility of the person involved. The government has no business telling people what is good for them.

    Also, the "war on drugs" is resulting in militarized police forces and police powers of search and arrest more fitting for a totalitarian state then a state that pretends to the rule of law (and my particular pet peeve is Dutch regulations on searching for guns, on the strenth of an anonymous phonecall, perhaps made by a cop, that is unknowable, police can arrest you and trash your house and not even have to apologize if they find nothing, the NKVD would be proud).

    In economics, I prefer limited taxes and limited regulation. The government again has no business telling everyone what to do and how to do it. The government should limit itself to creating the circumstances where free markets can thrive, see above for the to-do-list. Last but not least, when the shit hits the fan, the government should stabilize things.

    So, there you have my political views in a nutshell.

  4. You are very similar to me then :) I think you would be what is considered a classical liberal. A lot of American Libertarians are close to that (except for the fact that they are more extremist and would be against social safety nets, or the like.)

    I personally see that as the ideal form, which seems to have lost it way in the last century. I feel that modern liberals have become too statist--in areas that even they don't know why they want the govenrment meddling in it. An example is airlines, which seems more of an issue in Europe (from what I understand,) where a lot of liberals were pretty certain that the government needed to run one.

    Anyway, good to see a European retaining the tradition of the classical liberals :)

  5. But is you subscribe to largely the same ideas as me you cannot be on the left. Limited tax and regulation is not something parties of the left like...

    And letting me decide what I eat, drink or say, let alone what weapons I choose to have will give any leftwinger the vapors...

    You sure you want to think of yourself as leftwing?

    Now go read Adam Smith if you haven't yet, you will find most of what uou need to be good (classicsl) liberal-conservative there.

  6. Most of the left is very liberal on social issues but is skeptical of free markets. So what you will see is that the left tends to be in favour of personal freedoms far more than the right. For example, the left is far more in favour of letting people do whatever they want when it comes to sexual relationships (eg. homosexuals,) families (eg. abortion,) legalization of drugs, and so forth. I would argue that the left is also far more supportive of freedom of speech, with freedom-oriented organizations like ACLU in America often derided as leftist.

    However, the left for some bizarre reason against gun rights. They are also often restrictive when it comes to health issues, such as trying to ban fatty foods from school and the like.

    Most of what passes for popular left-wing theories these days seems to be skeptical of free markets and is supportive of a large government.


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