as scared as i am about the economic catatrophe that we are all going through, i’m beginning to get concerned that the moves by the federal agencies are all wrong. short-termism seems to be the way of it all. almost everyone supports the various bail-outs, few want to stay back and pick through the wreckage afterwards. something tells me this is wrong. even paul krugman, recent nobel laureat, has supported the moves in principle. i was interested to find, then, that looking at the japanese crisis of the 1990s, a paper that purported to examine economic darwinism:
This paper investigates whether the natural selection mechanism (NSM) of economic Darwinism works in severe recessions. Based on micro data, we constructed a comprehensive firm-level panel dataset for Japan from 1994 to 1998 to analyze a firm’s entry, survival, and exit and its relationship with TFP. Empirical results show that efficient firms in terms of TFP exited while inefficient ones survived in the banking-crisis period of 1996–1997. Further, this phenomenon is observed mainly for new entrants and contributes substantially to a fall in macro TFP after 1996. These facts strongly suggest a malfunctioning of NSM in severe recessions.
i then go on to read that a certain mr. krugman had written about this:
Finally, suppose that the government were in fact to simply give this bank money, say by buying off some of its questionable loans at par. Would this make the bank more willing to lend? On the contrary: If the logic of moral hazard applies - and the unwillingness of the banks to accept capital injections suggests that it does - better capitalized banks will be less willing to make risky loans, because they will care more about the left tail of the distribution of returns.
Strange, isn’t it? The Japanese bank bailout is supposedly the key to the recovery of Japan’s economy, which is supposedly the key to recovery in Asia; optimism sparked by that bailout has fueled a definite improvement in the mood in the whole region. Yet a simple example suggests that the rescue program is likely to end in farce, as banks decline to be rescued; and that if somehow the Japanese government finds the will to force the banks to take money anyway, it will actually be counterproductive.
Please tell me that I am missing something.
of course, the situation was not exactly the same (it never is), but it should give us pause. already it’s easy to see parrallels between measures taken in 2008 and those following the 1929 crash, and again with Japan in the 1990s. Neither of these had a good outcome.