The Volokh Conspiracy - The Bailout and the Market:

Co-conspirators Ilya Somin and Eric Posner are having an interesting debate (see chained posts) about what the market's near-collapse does, or doesn't, show about the perceived virtues of the bailout bill. It's an interesting epistemological question -- a question about how we know what we know about the world from the evidence presented.

On an ordinary day (and on pretty much every ordinary day) there's a headline in (pretty much) every newspaper that looks like: "Markets Close Lower on Intel Earnings Warning," or "Market Surges on Oil Price Drop," or "Inflation Fears Spur Stock Sell-Off," or the like. It's all pretty much total hooey -- the fact that we see it every day sometimes makes it look like it means something, but it doesn't. The stock market moves billions of shares every day -- over 4 billion yesterday -- as a result of millions of individual trades (over 17 million yesterday). Those are very big numbers. The market moves as a function of the aggregate of each of those decisions. The idea that a reporter, sitting at her desk making a few phone calls, can understand the "why" behind anything other than a vanishingly small proportion of those trades, is nuts.

Back to Ilya and Eric's argument. It seems to me that the following statements are indisputably correct:

1. If traders believed that the government was about to enact a bailout bill that amounted to a naked transfer of wealth from taxpayer to shareholders [Ilya's position, roughly], and had traded in anticipation of such a bill, the market would fall calamitously when the bill goes down to defeat. 2. If traders believed that the government was about to enact a bailout bill that would save the U.S. economy from descending rapidly into a credit crisis of vast proportions [Eric's position, roughly], and had traded in anticipation of such a bill, the market would fall calamitously when the bill goes down to defeat.

I don't see any way to distinguish between those two hypotheses without asking a (large) number of yesterday's traders what they had in their heads, and why they made the trades they made (and even that, of course, is deeply problematical, given the enormous difficulties of getting any reliable information from surveys of that kind).

All Related Posts (on one page) | Some Related Posts:

The Bailout and the Market:
Does the Stock Market Fall Prove that the Bailout Would have Been Worth it? - Round II:
Poof!...
A Simple Argument Against the Bailout:
Gary Becker's Doubts About the Wisdom of the Bailout:
Crony Capitalism:

	[David Post, September 30, 2008 at 1:21pm] Trackbacks The Bailout and the Market: Co-conspirators Ilya Somin and Eric Posner are having an interesting debate (see chained posts) about what the market's near-collapse does, or doesn't, show about the perceived virtues of the bailout bill. It's an interesting epistemological question -- a question about how we know what we know about the world from the evidence presented. On an ordinary day (and on pretty much every ordinary day) there's a headline in (pretty much) every newspaper that looks like: "Markets Close Lower on Intel Earnings Warning," or "Market Surges on Oil Price Drop," or "Inflation Fears Spur Stock Sell-Off," or the like. It's all pretty much total hooey -- the fact that we see it every day sometimes makes it look like it means something, but it doesn't. The stock market moves billions of shares every day -- over 4 billion yesterday -- as a result of millions of individual trades (over 17 million yesterday). Those are very big numbers. The market moves as a function of the aggregate of each of those decisions. The idea that a reporter, sitting at her desk making a few phone calls, can understand the "why" behind anything other than a vanishingly small proportion of those trades, is nuts. Back to Ilya and Eric's argument. It seems to me that the following statements are indisputably correct: 1. If traders believed that the government was about to enact a bailout bill that amounted to a naked transfer of wealth from taxpayer to shareholders [Ilya's position, roughly], and had traded in anticipation of such a bill, the market would fall calamitously when the bill goes down to defeat. 2. If traders believed that the government was about to enact a bailout bill that would save the U.S. economy from descending rapidly into a credit crisis of vast proportions [Eric's position, roughly], and had traded in anticipation of such a bill, the market would fall calamitously when the bill goes down to defeat. I don't see any way to distinguish between those two hypotheses without asking a (large) number of yesterday's traders what they had in their heads, and why they made the trades they made (and even that, of course, is deeply problematical, given the enormous difficulties of getting any reliable information from surveys of that kind). All Related Posts (on one page) \| Some Related Posts: The Bailout and the Market: Does the Stock Market Fall Prove that the Bailout Would have Been Worth it? - Round II: Poof!... A Simple Argument Against the Bailout: Gary Becker's Doubts About the Wisdom of the Bailout: Crony Capitalism: