Actually Charles, man in nature is not a free individual in the sense of American myth.

WTF? Over. I'm not sure I have the time to reach semantic agreement with you on words like freedom, much less American or myth.

Never mind. Your fundamental problem is understanding basic concepts. Bailout != cookie, or at least it doesn't have to.

A bailout certainly isn't a punishment, and it mitigates the costs of imprudent risk taking behavior, at best an implicit reward if nothing else.

And yes, parents bail out their children (Mr. Smith, here's the money for the window Johnny broke) and punish them (Johnny, you're grounded and you'll do chores to pay me back) all the time.

Two things here. First, parents are usually financially liable for the damages their children cause. These are goddamned children, but adults who were making their own decisions. They made bad ones, reckless ones in part due to ignorance of the impact of new financial instruments, but also because of the second reason; government has signalled previously a willingness to bail out companies in the past.

The failure to understand is not mine, but yours. You can't grasp the basic premise here: continuing to bail people out creates and incentive for them to not behave prudently. Parents do this. If their child breaks a window at 10, yes they pay the costs then punish the child. However, after a certain age the child is often left to their own devices...either that or you end up with a 42 year old who acts like a 10 year old.

What? How? This makes no sense. Do/would you do this with your children? Go to your room, oh and here is a cookie.

Never mind. Your fundamental problem is understanding basic concepts. Bailout != cookie, or at least it doesn't have to.

And yes, parents bail out their children (Mr. Smith, here's the money for the window Johnny broke) and punish them (Johnny, you're grounded and you'll do chores to pay me back) all the time.

Oh! And fairness issues span other social species ... that was an earlier thread here, wasn't it?

(I'm all for rationality, but sometimes with bailouts & etc., we shouldn't be surprised my a merely "human" response.)

I think Steve's fundamental problem is not seeing the obvious- bail out the companies and punish them.

What? How? This makes no sense. Do/would you do this with your children? Go to your room, oh and here is a cookie.

Raoul,

More Krugmans....*shudders* I don't think granting corporations monopoly power is the solution at all.

Done artfully, the perpetrator is retired 3-4 years before it hits the fan, and the bailout becomes a question.

Does Howell Raines fit that description?

(Cynics might note that if done REALLY artfully, the principal has moved to a government oversight job.)

A reverse Madoff? Heh, now that is disheartening.

Classic macro-economic theory should have been applied during the last eight years. It was not which has contributed to current problems.

What do you mean "classic macro-economic theory"? Neo-classical growth models? New Classical economics? Neo-Keynesian?

I'd argue that most of the Bush Administration was characterized by Neo-Keynesianism. Mankiw is probably best described as at the very least sympathetic to that view of macro-economics. The tax rebates and cuts fit in well within the Neo-Keynesian paradigm.

One of the problems of economic theory is that it does not take into account popular will. If there is no will to implement what would be "proper" policy, then one must come with alternate functioning theories.

This makes no sense. There is no will for a "proper policy" hence we have to jettison a perfectly fine theory? What?

All I hear now is essentially reverting to a modified 19th Century laissez-faire model; but for good reasons, there is no political will to do that.

Actually it is the opposite. Obama is a technocrat and he will fiddle with the economy just as Prescott and Kydland posit in their seminal paper "Rules Rather than Discretion: The Inconsistency of Optimal Plans". Even Bush, the supposed Arch-Fiend, has admitted to sacrificing free market principles to "save the economy".

Let's be clear: old fashion economists are advocating that people need to suffer more; well, that's a hard sale considering the well off have done like bandits (pun?) the last twenty years, the national income has grown commensurately but the living standards among the majority has at best stagnated.

The evidence is far from conclusive on this. If you look at things like wages, yes they have been stagnant, even income has shown at best weak growth. However, in looking at consumption data the story is different, and consumption is probably a better way of measuring standard of living. Then there are issues like health care expenditures and income...is income stagnant becuase health care is sucking up all the productivity gains made by labor? And something that is probably of secondary importance is immigration, especially illegal immigration, to the extent that illegal immigrants are captured in official data, we'd want to account for that.

And now the princes of wisdom want people standard of living to degrade.

No. Standards of living may degrade, but that is not the desired result, although it might be the result of a policy of not bailing out these various corporations. And is your argument really for corporate welfare?

Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Done artfully, the perpetrator is retired 3-4 years before it hits the fan, and the bailout becomes a question.