Why Does the Worldwide Financial Crisis Fester So?

In today’s Journal, David Wessel nails it. (If you ask me, Wessel nails it consistently.) First, he asks the question that needs to be asked:

It has been two years since the flames were first spotted in Greece, yet the blaze still hasn’t been put out. Now it has spread to Italy.

It’s been five years since the U.S. housing bubble burst. Housing remains among the biggest reasons the U.S. economy is doing so poorly.

On both continents, there is no longer any doubt about the severity of the threat or the urgent need for better policies. Yet the players seem spectacularly unable to act.

What’s taking so long?

And then he offers a compelling answer:

Deciding who will get stuck with the tab.

“In every crisis, you have to allocate the losses between debtors, creditors and taxpayers,” says Anna Gelpern, an American University law professor and former Treasury official. “It’s a shockingly simple concept, and completely intractable.”

“By definition, it’s a political problem,” she adds. “Even if you came up with an optimal allocation, if it’s not politically salable, it can’t happen.”

Most people agree by now that our political structures are too incapable and/or impotent to a) responsibly address a crisis of this nature; and b) help create a framework that would prevent future crises.

To my mind, much of the trouble lies in how politicians’ incentives are badly misaligned: they are rewarded for short-term, self-interested activities (raising money, getting re-elected, coming down on the right side of short-term public opinion) while the goals the public really wants accomplished are long-term, public-interest works (which have almost nothing to do with raising money, electing politicians, or getting a good headline).

I have some inchoate ideas for how to address this incentive gap — to be framed out and written about here someday, hopefully — but I’m wondering what you all think of this politician-incentive problem and possible solutions to it?

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  1. dave says:

    There seems to be not just opposition to ideas, but real hate on the part of the ‘christian’ (supposedly) repubs for the President.

    He is the elected leader of the US, has not sent soldiers off to die in a war of choice like bush, has not caused a financial crash like bush.

    Where does this hate that pubs simply radiate, where does that come from? I don’t think Jesus would approve, as he preached love your neighbor and do unto others. I don’t see much of that, if any in GOP.
    So many republicans call themselves christian and followers of the bible, but once again their hypocrisy and lack of christian love allow themselves to express themselves like low-class rednecks.

    What happened to ‘love your neighbor’ and ‘do unto others’ in the view of these supposedly ‘christian’ republicans?

    Also, pubs used to believe in liberty and personal freedom, but now pub candidates are required to sign pledges to deprive a woman of liberty in choosing whether or not she carries a fetus to term. Also, they insist candidates stand in the way of personal freedom for gay taxpayers.

    They also ‘talk’ but do not do when it comes to debt and deficits. Clinton gave the U.S. a surplus, but reagan/bush drove the debt and deficits up, and george w bush exploded the debt/deficit taking Clinton’s surplus in 2001 and handing Obama a trillion dollar deficit in 2009.

    Character, class and common sense would seem to be lacking in many pubs, maybe nascar pubs too.

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  2. Jason says:

    Damn you, Dubner! If I wanted to think for myself I’d turn on the television! Get on that framing and writing!

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