Ben Bernanke: The Little Dutch Boy

The last place in the world you wold expect to hear support of Ben Bernanke is hear. The Bernanke Fed has been as reckless in its attempts to reflate the economy as the Greenspan Fed – probably more so. Nevertheless, when Willem Buiter, a former member of the BoE ‘s Monetary Policy Committee slammed Bernanke for his reckless policies (see pdf file here), I was surprisingly more taken with the argument in defense of Bernanke from Alan Blinder.

One day a little Dutch boy was walking home when he noticed a small leak in a dike that protected the people in the surrounding town. He started to stick his finger in the hole, but then he remembered his moral hazard lesson. “The companies that built this dike did a terrible job,” the boy said. “They don’t deserve a bailout. And doing that would just encourage more shoddy construction. Besides, the dumb people who live here should never have built their homes on a floodplain.” The boy continued on his way home. Before he arrived, the dike burst and everyone for miles around drowned, including the little Dutch boy.

Mr. Blinder continued: “You might have heard an alternative version of this story circulating around the Fed.”

In this kindler, gentler version, the little Dutch boy, somewhat desperate and very worried about the horrors of the flood, stuck his finger in the dike and held it there until help arrived. … It was painful. The little Dutch boy would much rather have been somewhere else. But he did it anyway. And all the foolish people who live behind the dike were saved from the error of their ways.

WSJ, 23 Aug 2008

Buiter happens to be a Dutchman by birth.

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