TT's Lost in Tokyo — by TokyoTom

In a letter to the editor cross-posted to Cafe Hayek on October 23, Steven Horwitz, in responding to a reader who croticizes George Will’s recent column on Elizabeth Warren, challenges “a number of fallacies about the recession and financial crisis”.

In trying to distinguish ‘capitalism’ from the “government intervention and crony corporatism” that Horwitz sees as the cause of our current mess, Howitz seeks to lay blame off on government, while absolving from responsibility the firms that benefitted from the government inverventions:

If all the traffic lights in Watertown were stuck on green, we’d hardly blame the drivers for the ensuing accidents. When government distorts the signals and incentives facing producers and consumers, the blame for the resulting disaster should fall on government not the private sector.

Nonsense. Even if it was government that created signals that mucked up the works, government acted in response to pressure from people who stood to benefit, and we have every right – nay, we OUGHT – to be upset with them, as well as with others who acted to suit themselves, knowing that the downside would be borne by others.

Our outrage is our final line of defense against damaging behavior; we should tune and direct it, not dampen it. More on “Moral suasion” here.

I left the following comment (emphasis and link added; slight edits):

TokyoTom October 26, 2011 at 8:28 am

Let’s face it: our financial sectors is a massive, stinking mess, resulting proximately from rampant moral hazard encouraged by government laws and regulations – chiefly, the deposit insurance that substituted Government and .taxpayers’ pockets for oversight by depositors who no longer considered that they were putting their money at risk.

The central role of ‘government’ does NOT. however, eliminate the responsibility of men and women in various institutions that took advantage of incentives to maximize personal gain while shifting risks and losses to others.

In this, I have to disagree strongly with Steve, who seems to want to hold only ‘Government’ responsible. Emphatically No – to increase responsibility we must not simply restore risk, but also demand better behavior and call out those whose actions are shameful.

The relaxation of leverage standards much discussed above took place only because investment bankers who had gone public – and thus were playing largely with public investors’ capital and not their own – wanted to load up on risk, the better to reap massive profits during the bubble and downloading risks to shareholders (in addition to risks deliberately played off to insured banks, Franie and Freddie, and to other market participants giddied by the bubble).. They all played this game so well that they made billions in bonusses, even as they made their own institutions so opaque that they could no longer measure each other’s counterparty risk and brought each other crashing down. Lehman’s CEO Fuld, who made over $100 million annually in compensation and bonusses in each of his last few years, is just one example.

Those who sought, took advantage of and approved of this nonsense, and then sought and approved of bailouts ALL richly deserve and NEED our strongest condemnation.

None of this “We can’t blame drivers for ‘accidents’ that hurt others, because Government messed up the signals” for me.