Heads I Win, Tails You Lose

As Congress discusses ways to bail out lenders, borrowers, mortgage insurers, everyone in between, Martin Wolf lays it out:

Those who do not learn from history are condemned to repeat it. One obvious lesson concerns monetary policy. Central banks must surely pay more attention to asset prices in future. It may be impossible to identify bubbles with confidence in advance. But central bankers will be expected to exercise their judgment, both before and after the fact.

A more fundamental lesson still concerns the way the financial system works. Outsiders were already aware it was a black box. But they were prepared to assume that those inside it at least knew what was going on. This can hardly be true now. Worse, the institutions that prospered on the upside expect rescue on the downside. They are right to expect this. But this can hardly be a tolerable bargain between financial insiders and wider society. Is such mayhem the best we can expect? If so, how does one sustain broad public support for what appears so one-sided a game?

Yes, the government can rescue the economy. It is now being forced to do so. But that is not the end of this story. It should only be the beginning.