Long-Term Confusion

Tyler Cowan has an amazingly confused piece in this morning's NYT arguing tht we owe our current plight in large part to the "bailout" (I use the term advisedly) ten years ago of Long-Term Capital Mangement (link). But the point of LTCM, as Tyler's own piece acknowledges (but Tyler ignores) is precisely that LTCM was not a bailout, except perhaps in the sense that the Feds provided lunch. Okay, and a little bit of arm-twisting. But I should think that would be on the approved list for even the most hairy-chested libertarian. The message was: look, we love ya, and we will work with ya, but we will not put skin in the game.

Indeed, I'd like to find a way to generalize. The test of a good cop is not how many arrests he makes, but how much order he keeps. The test of a good general is not his kill rate but the number of battles he wins. The measure of a good central banker is not how well he runs a bailout but how little he needs one. Of course at the moment, ours seem to flunk either test.

Afterthought: Nothing said here is meant to contradict the more general strategic point--we cannot expect good results from heads-I-win, tails-you lose. If we know we are going to guarantee the downside, we have to regulate the upside. Oops, sorry, should have said tht ten years ago. ...