Sure, they all can tell us that companies should not be routinely bailed out but in situations of financial contagion bailouts may be sensible, but do they really know whether such a situation exists today or not? Or how to respond? I was skeptical about whether they knew or not, but didn’t want to be impolite, because so many of them are smart and helpful, but my suspicions were confirmed by one of them, anyway:
On the one hand, I share many of the concerns of the letter signers [a reference to a letter opposing the bailout signed by a number of economists] and other critics of the Treasury plan.
On the other hand, I know Ben Bernanke well. Ben is at least as smart as any of the economists who signed that letter or are complaining on blogs or editorial pages about the proposed policy. Moreover, Ben is far better informed than the critics [my emphasis]. The Fed staff includes some of the best policy economists around. In his capacity as Fed chair, Ben understands the situation, as well as the pros, cons, and feasibility of the alternative policy options, better than any professor sitting alone in his office possibly could.
If I were a member of Congress, I would sit down with Ben, privately, to get his candid view. If he thinks this is the right thing to do, I would put my qualms aside and follow his advice.
Thus blogged Greg Mankiw, not any old ordinary economist, but one who actually has experience in government. So much for checks and balances! So much for the majesty of democratic deliberation! Does it remind you of the Bush administration’s explanation for its war-on-terror activities? We have to eavesdrop on people but we can’t tell you why because if we did, we would reveal our methods and lose the ability to eavesdrop.
By the way, I’m not opposed to a bailout. Like Mankiw, I favor a bailout because Ben does. And I favor eavesdropping because Mike does. Anyone have a better suggestion for deciding what to do?
(I will add that Mankiw posted a letter from a colleague who says that even if Ben is better informed than any other economics professor, he lacks the collective wisdom of all economics professors, and that is why it was correct for the colleague to sign the letter from economists that opposed the bailout plan. The colleague goes on to say that there are better ways of solving the current financial crisis and cites a recent WSJ op-ed written by some other economics professors. The problem not mentioned by the colleague is that while the collective wisdom of economics professors opposes the Paulson plan, it has not converged on an alternative: the collective wisdom fragments into dozens of ideas proposed by little clumps of professors. So the letter itself is a useless document and Mankiw was correct to withhold his signature. Should a member of Congress listen to Ben or listen to a (randomly selected?) clump of economics professors who favor one or another alternative?)
Me too, me too, and if so I haven't heard it.
Roughly as much as meteorologists.
If so I'll applaud him for not letting his position or prejudices cloud his decision making process.
And when he lays out a hard cap on bail-out terms, a metric for determining success or failure, and an alternate plan to be implemented in case the bailout fails, perhaps an Austrian approach, I'll stand up and cheer. I rather fully expect a big bailout which will fail to fix anything for longer than a quarter and then another big bailout will be proposed to "really fix it this time", which will fail, and the cycle will continue until the market has self-corrected, merely coincidentally. But I'll be overjoyed to be proven wrong.
Those facts coupled with equal amounts of skepticism toward both Wall Street and Washington D.C. leads me to intuitively suspect that either no bail out or a highly modified/truncated bailout only is more likely to be a better plan - in the long run - than a massive bailout.
And there are some economists who are suggesting a bailout, or at least the wrong bailout, could even deepen the crisis, either immediately or by virtue of only forestalling a deeper crisis until some future point.
A concise critique of the bailout from someone with industry knowledge.
Just because the field of economists fragments on what we should do isntead of a bailout does not mean that they should be ignored as to the binary question of, Should we bailout Wall Street? The economists' answer seems to be "No," and I think that should be given credence, especially since Paulson and Bernanke would likely have Wall St. biases (not in a corrupt way, but merely because that is where their allegiances lie)
And yet, up to last week, Bernanke and Paulson were completely wrong about the depth and severity of the problem. Meanwhile, many other prominent economists spotted the problem months/years ago.
Go figure...
I appreciate this post most because it recognizes the reality of lack of information. So often, bloggers, pundits, and even law professors opine without all facts. That's not to say their opinions don't have merit. It just reoognizes that, as with most of our highly publicized debates, we're often operating in a vacuum.
There's nothing wrong with saying "I don't know," and admitting that those most privy to the information likely do. I don't necessarily oppose the bailout either. The only thing I oppose is doing it with a speed that fails to consider all the relevant facts.
[PS, welcome to the VC from a 02 grad who enjoyed your employment law class]
Someone asked me today to give the best (and simplest) explanation of what Paulson is trying to do. OK. So I tried and the below is the result.
This doesn't mean I support or defend the Paulson plan, just that I am trying to understand it.
Obama has a real problem. If voted out he has to look for a real job and if he is lucky he will defend white collar commanders and thieves. Unlike McCain he has more to worry about because his wife will have to hit the bricks to make ends meet bcause of the demands of their life style and the future education of their kids. Teaching at Harvard just will not be enough money.
McCain has less worry. He is set for life. If he drops dead in January win or lose his family will stay rich. At 72 years old the best years are behind him. His life is on cruise control - and he does not have to prove a thing. The man get free heath care, a military disability paycheck, social secuirty and what ever else is is government due.
Does anyone seriously think he'll remain objective when his former friends and colleagues start lining up for hand outs?
Isn't there someone without longstanding ties to Wall Street that would better serve us?
Yes, thank you, I do understand it's a credit market problem, for example had read Steven Pearlstein, via beldar's blog, who outlined that fact nicely.
Still, the "trust me" reasoning is pivotal even in Pearlstein's "alarm bell" piece. Further, Congress is evidencing it's far too predictable penchant to essentially earmark paybacks to the proposed legislation, which also suggests the Barney Franks and others who previously derided the need for better legislation, are not learning requisite lessons. So if still largely on an intuitive basis, I'm favoring a less-is-more approach in terms of attempting to rectify long-term and more deeply seated problems, some of which are at the root of the current crisis.
"Economists were put on this planet to make astrologers look good." - The West Wing
But they don't, because they made bad choices. That's why they're broke.
Which is why the bankrupt firms are worth something, and their assets will be purchased, though at relatively low prices. The new owners will sort it out. That's what happens when companies go bankrupt.
It's true that the collective wisdom of the economists hasn't converged on any one alternative to the bailout. But the economists who are against the bailout tend to believe that the bailout will make things worse, not better (i.e. - it is worse than the status quo). If they are right, we should reject the bailout even if we can't agree on an alternative plan.
Like Mankiw, I favor a bailout because Ben does.
I'm inclined to oppose a bailout because Ben Bernanke favors it. Agency capture doesn't stop at the lower echelons of an agency.
If they are right
Isn't that the $64 question, about 11,000,000,000 times?
We also have an unconfirmed report that China is instructing their banks not to loan the U.S. any more. If that is done, there won't be $700 billion to fund the infusion, without triggering inflation that could exceed 100% per annum, and subject Americans to a sudden fall in living standards that will cripple the economy worldwide.
Our modern economy is based on fiat currency, which is in turn based on credit, which is about belief and expectation, not about hard fundamentals. It depends on continued growth, and if growth falters, the world economy can fall like an avalanche, down to a subsistence level.
There seems to be an increasing number of voices being registered against a massive bailout. Minimally, fear as a sole or primary motivator and fear mongering should be avoided.
Well, economists, congressmen, and weathermen are the only people paid to be constantly wrong.
I'm not an economist or a financial analyst but it seems obvious to me, and a lot of other common folk, that the underlying problem is too much debt. We've been living beyond our means for not just years, but decades. This isn't going to be "fixed" by anybody. It's just going to unfold.
Bernanke is supposed to be an expert on the Depression. Well, I'm not an expert on it but I've read enough about it to know that nothing Roosevelt did worked. In the end only the war ended the Depression.
Sometimes it's harder to know when to make a decision than to know what decision to make. I'm generally in favor of delaying this process a little more to give Ben and Hank a chance to gather more information, do a little more processing, and ensure they haven't missed any more sensible alternatives.
For example, how much consideration has been given to how these bailout plans will be affected by a shift to IFRS standards?
Actually Doc, those firms were forced into the bed by our well intentioned congress. Of course our well intentioned congress doesn't play with only their money, mostly ours.
A lot more than law professors, like you.
The Reuters story which you linked to, datelined Wed Sep 24, 2008 9:52pm EDT, and which repeats a rumor from the South China Morning Post, contains incorrect information.
Reuters has an updated story, datelined Thu Sep 25, 2008 5:46am EDT, “UPDATE 3-China denies shunning foreign banks”.
More directly, the China Banking Regulatory Commission (CBRC) has posted its CBRC Spokesperson's Statement:
“Strongly condemn” is an interesting word choice, isn't it?
Can you name someone you would consider both qualified and disinterested?
Point taken, wilky. And ultimately, if the bastards don't/didn't get voted out, maybe it's "our" fault. Nevertheless, as the bumper sticker says, "Don't blame me, I voted Libertarian."
I know a lot of scientists who are at the absolute top in their fields, best in the world.
FREQUENTLY they turn out to be wrong. Experts have bitched up a lot of things over the years.
There is also something to be said for listening to the people who will have to pay for this nonsense. I like the comment from that PA Democratic congressman who said his email/phone calls from constituents were running 50/50 on the matter: 50% "no" and 50% "hell no."
My guess is that the Asian/European bankers who hold all our paper threatened to pull the plug and hose us but good. As a saver and a prudent person, I actually wouldn't mind 12% interest rates for a while; it would certainly teach a bunch of idiot people some useful lessons, ones that we learned in the late 70s, but most have unfortunately forgotten.
How about no credit available at any rate, so you have to pay cash for everything. Or no longer having a job? Or having more than 10,000% inflation so that your cash can't buy enough to meet your basic needs for food, shelter, etc.? Or losing all your savings and investments, either the corpus or the value? Do you own land on which you can survive by growing your own food? Is it defensible from the hoards of refugees and squatters?
Most people don't appreciate how fragile is our credit based economy. If credit fails, we are back to an 1890 economy but with more people than we can keep alive.
Gluttony kills more men than the sword.
Good health is above wealth
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