Would the Real Tyler Cowen Please Stand Up?

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?

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. Drew says:

    You know, Steve. I’ve read so many comments by people on this site who describe themselves as “libertarian” and yet they are invariably defenses of the latest big government solution proffered by President Obama and his Congressional allies.

    They know who they are, and I bet you do too. I don’t buy it.

    Tyler? Haven’t read enough of his stuff, but beware a wolf in sheep’s clothing.

  2. odograph says:

    The distinction seems to be that LTCM was not, in itself, a “Great Depression risk.”

    And so bailing out in a non-crtical situation created avoidable moral hazard.

    Of course baling out in a critical situation also creates moral hazard, but it is a bit like bolting the door with the horse gone at that point.

  3. steve says:

    Reading Cowen every day, my sense is that he believes that we would have risked more loss of liberty, full nationalization for example if we had not bailed out the banks. He also has a strong moral sense and has expressed concern about the real effects of 20% unemployment. IOW, he does have a little humility, often lacking in libertarians.


  4. I’d hate to think that Cowan strayed from the One True Path merely because of facts on the ground. That would imply that he was capable of learning. And that in turn would imply that he allowed reality to affect his ideology.

    Once we start down that road who is going to drink all this Kool Aid?

  5. Tom says:

    Here are the facts on the ground:

    From Dec. 07 to Sept. 08 the unemployment rate increased 1.3 percentage points. From September 08 (when the politicians announced the need for the bailout and its subsequent passage) to July 09 the unemployment rate has increased 3.2 percentage points. The recession has worsened since the bailout and stimulus!

    On the jobs front the bailout looks even worse than on the unemployment rate front. From Dec. 07 to Sept. 08 the economy lost 1.42 million jobs. From September 08 (when the politicians announced the need for the bailout and its subsequent passage) to July 09 the economy has lost 5.24 million jobs.

    Things have certainly gotten a lot worse than better since the bailout. The bailout apologists will say yeah but it could have been even worse. Let’s say you got ill and decided to see the doctor. If his treatments were making you progressively worse and worse after each dose of treatment, would you buy the doctor’s explanation that without his treatment you would be in even worse shape or would you fire his ass and find a different doctor?

  6. anjin-san says:

    Here are the facts on the ground:

    The fact is our banking system damn near collapsed last September. I am not a fan of Mr. Bush, but in his ham handed way, his administration averted a real disaster by propping up the banks.

  7. Tom:

    Dentistry not medicine. It hurts. Then it doesn’t. Then you still have a tooth and it doesn’t hurt anymore.

    As Obama has said about a thousand times: it took years to get into this, it’s going to take a while to get out.

  8. Tom says:


    You haven’t given any facts. What you have given is an ideologically driven response handed down by the leader. You sound like a robot programmed to spew out the latest party line.


    The same goes for you too. Bush and Paulson didn’t save the banking system. They saved their political connected fat cat buddies on Wall Street from rightly losing their shirts. You have been suckered into believing that giving taxpayer money to millionaires on Wall Street was a good idea.

  9. Tom:

    For my own eddification, perhaps you’d point out the exact portions of my comments that support this statement of yours:

    spew out the latest party line.

    What is the “party line” I’m spewing?

  10. glasnost says:

    Steve slash James, I wrote a long, somewhat obscene rant explaining to some people what exactly would have happened to the economy without the bailout. It is stuck in your anti-spam queue. Please rescue it. If you feel like it, I have no objection to deleting the curse words and the occasional capital letters words. I hope you keep the asterisks, though. I can’t really email right now to notify as I don’t have access to the right account.

  11. Steve Verdon says:


    I’d be more impressed if there was some sort of discussion for putting in place mechanisms to avoid the avoidable kind of moral hazard. There isn’t, so I’m not.

    My sense is that Cowen is actually lost.


    Yeah, well as someone I know once said, “Don’t let your mind be so open your brain falls out.”

  12. Anderson says:

    I’d be more impressed if there was some sort of discussion for putting in place mechanisms to avoid the avoidable kind of moral hazard.

    But that would be TEH REGULATION, which is forbidden, lest the purity of the free market be soiled.

    It makes more sense to me not to let entities become “too big to fail,” and thus to LET them fail when they risk big and lose big. Part of this would seem to include restricting them from operating on multiple levels. Banks should be banks, investment firms should be investment firms, insurers should be insurers, etc.

    A relatively free market playing within certain rules makes more sense to me, economic illiterate that I am, than a free-for-all market that periodically has to be compensated for its insane behavior by tossing it a trillion dollars from the public debt ledger.

  13. Steve Verdon says:

    But that would be TEH REGULATION, which is forbidden, lest the purity of the free market be soiled.

    Well technically no. Markets rarely have an issue with time inconsistency. Its usually a problem for policy makers–i.e. politicians. So one could solve the problem by moving to a market with no government intervention. Of course that isn’t likely to happen.