Monday, October 20, 2008

Anna Schwartz Gives Lessons to Policymakers, Part II

Cowen disagrees with Schwartz's assessment that I presented in a previous post.

I think he's wrong. I believe all efforts should have been directed to banks that are in good financial shape so they stay in good financial shape. There are many banks that behaved in a conservative manner and would qualify for that kind of decontamination.

That would have avoided a domino effect while reducing asymmetric information and moral hazard problems. Easier said than done, but surely the principle that should have been at the core of any government plan.

I don't believe it's good health policy to hide the effects of a highly contagious disease and let the carriers wander around the healthy. We don't save the flotilla by tying all smaller boats to the Titanic while it's sinking.

PS: Kling makes a similar point in this post.

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