Tyler Cowen has written several posts in favor of the bailouts. His argument goes something like this:
Note that even when the Fed “bails out” a large investment bank, or insurance company, they are checking a chain reaction which would likely spread to some commercial banks, thus bringing in deposit insurance as well, not to mention further bankruptcies. And that’s not even considering that Congress probably would have stepped in, I’m just looking at laws already on the books.
From this post here. He’s also argued that Milton Friedman would have been in favor of bailouts as way of preventing the money supply from dropping like it did at the beginning of the recession that would later become known as the Great Depression.
Problem is, this really doesn’t fit well with a recent New York Times article written about 8 months ago by Prof. Cowen. In that article Prof. Cowen argues that the bailout of Long Term Capital by the federal government created a problem with moral hazard. That upper management at similar companies felt embolden to take riskier investments so long as their failure would be perceived as threatening the global financial system.
In other words, a bailout today may very well necessitate larger bailouts in the future. In all of his recent defenses of the bailouts Prof. Cowen has side stepped the issue of perverse incentives and dynamic time inconsistency which could lead to future bailouts possibly of increasing magnitudes. These in turn could expand the size and scope of government. In other words, was the December 2008 Tyler Cowen more “libertarian” than the August 2009 Tyler Cowen or the other way around?
