Wednesday, April 23, 2008

Accountability is everything

Free markets only work when there are incentives and feedback mechanisms to encourage people to do the right thing. While America isn’t the freest economy in the world, it’s in the 95th percentile, which (with its commitment to democracy and free speech) has been the key to its economic success.

There were two tidbits this morning in the WSJ, one encouraging, one not.

The encouraging one was the decision of the Olin Foundation to go out of business. The creation of permanent, self-perpetuation nonprofit foundations is among the most foolish vanities of their (vain and often foolish) millionaire donors, for exactly the reason that Peter Flanigan has said:

Perpetual foundations are quite silly. They exist for the benefit of trustees and staff rather than for the goals set forth by the original donor.
Fortunately, donor John Olin created a foundation that did go out of business, a model other donors (Bill Gates?) should emulate.

The less encouraging note was a series of letters responding to a column by Ethan Penner earlier this month that identified the huge moral hazard created by the Federal Reserve’s “too big to fail” policy. Letter writer Thomas Shively was even more emphatic:
Those who fault the Fed … primarily focus on the exceptionally loose monetary policy …. [This was] only one example of the so-called Greenspan 'put,' now the Bernanke put -- the embodiment of the Fed's long-standing policy of always running to the rescue, while letting the good times roll, which has fostered the culture of moral hazard.

There is tremendous irony, and common sense, in the realization that multiple successful rescues of the financial system by the Fed over several decades will eventually create a risk-taking culture that even the Fed will no longer be able to single-handedly save, at least not without serious inflationary consequences or help from foreigners to avoid a dollar collapse.
Giving away a “put” to investors, large and small, assures that put will be exercised and that Uncle Sam spends ever-more money bailing out less prudent or more reckless members of society. It’s almost enough to make one wish Ron Paul had achieved electoral success, since on this one issue he’s 100% right.

Ironically, I found this on the day that the WSJ reported that its new owner no longer is content to have the country’s most important business publication. Instead, Rupert Murdoch will be de-emphasizing business coverage (and longer stories in general) to offer a center-right competitor to the center-left NY Times. I don’t know if this means we’ll have less intelligent coverage of economic issues in the WSJ, or just less coverage, but it’s a big opportunity for Business Week, Fortune and Forbes (and perhaps the FT as well).

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