Tuesday, April 1, 2008

Dem's vs. Repub's on interpreting failure

There are two policy reactions to observed failures. Democrats are more likely to think that more regulation is necessary to prevent future failure while Republicans are more likely to intrepret failure as the normal functioning of markets which punish bad behavior more swiftly and surely than the government could. The loss associated with failure creates an incentive to avoid future failure.

These two views are manifest in this video policy debate. In the case of Bear Stearns, Democrats want new regulations while Republicans think the market punished Bear Stearns for investing heavily in mortgage-backed securities.

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