I don't get angry about economics related things often, but I am right now (I could not have posted what I was really thinking). Congress needed to get something done. This is completely disfunctional [sic]. Disgusting. This shows no regard for people who might lose their jobs over this. I know a lot of you think we can get through this — you are nuts to take that chance, this is extraordinarily dangerous — why do you think all the economists are so scared, the ones you've trusted in the past ... (Professor Mark Thoma, after Congress voted against a $700bn bailout plan)There is nothing like a crisis for the production of journalistic and blogospheric hot air. Much chest-beating, little sober reflection. And isn’t it funny how the ‘experts’ just know what the correct solution is, however unprecedented and colossal the problem.
One might have thought a little humility was in order, given the circumstances. Leaving out theories about bankers’ greed, which are unverifiable and hence useless — and leaving also to one side the question of whether the public has been over-encouraged to take on debt by a ‘you too’ ideology — we can put the present mess down to two specific technical factors:
(A) the Fed kept rates below the market-clearing level after 9/11, resulting in excess borrowing and generating various credit-fuelled bubbles, particularly in housing;
(B) banks have engaged in rocket-science activities which turned out to be insufficiently thought through or double-checked for what-if problems, and which have come back to bite them (and everyone else) on the backside.
Now (B) can be put down in large part to excess hubris on the part of people who were too ready to believe in their own models, or trust someone else's just because he or she could show off some clever mathematics. It can also be put down to the mediocratic policy of brushing aside doubters with phrases such as “it’s a no-brainer” or “don’t be a wuss”.
Similarly (A) — credit rates kept artificially low to stave off recession after the tech boom — was no doubt based on faith in trained experts (in this case, macroeconomists) asserting that such a policy would not have adverse consequences. In fact, of course, we see not only adverse consequences but one of the worst post-bubble fallouts in modern history.
You might think this was a time for taking a step back. A time for reckoning we may have to reconsider first principles, given that the micro- and macro-economic activities of the last ten years were clearly based on a pack of dodgy calculations. A time for thinking more cautiously, given that the problems could be said to have arisen from people thinking too quickly, or not thinking at all.
Instead of this, we (the public), reading the pronouncements of the ‘experts’ — from Treasury analysts, to academic economists, to newspaper editors, and econ-bloggers — are now asked to take on trust that it is correct to approve the biggest corporate bailout in history, purely on the basis of their confidence this will make things all right.
“Please”, they say, “if you don’t do this, the world will collapse. We know our mis-analyses are to some extent responsible for the rubbish that has been generated, but we really have thought it through properly this time, and we promise it will work!” US Treasury Secretary Hank Paulson apparently went down on bended knee to beg the Speaker of the House of Representatives to help put the bill through. After Monday's vote went against the plan, the chorus of disgust from the experts was hard to miss. “This Republican Party needs to be burned, razed to the ground, and the furrows sown with salt” opined Professor DeLong. Professor Krugman offered a similarly considered view: “OK, we are a banana republic ... what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies”.
Various people cite comments by Republican spokesmen to ‘prove’ that those who voted against were motivated by the ‘wrong’ considerations. But what people say and how they vote are two different things, a phenomenon familiar to polling analysts.
Willem Buiter threatened a long list of dire consequences if the bill were to fail: “US stockmarket tanks ... banks will stop providing credit ... banks will collapse ... no bank will be safe ... consumer demand and investment demand collapse ... [we have a] Great Depression”. I don't know how well Professor Buiter understands markets because (a) the US stockmarket didn't continue to fall after the initial negative reaction to the ‘no’ vote, (b) it did however fall sharply after the bill was passed on Friday. Is it possible the market knows better than Professors Buiter, Krugman, Thoma et al what is good for the economy? Perhaps so, not because of the ‘wisdom of crowds’, but because — unlike decisions made by academic economists — choices in the market are made by people with money at stake.
Professor Buiter thinks that those congressmen who rejected the bill on Monday because they queried the effect it would have on the operations of the free market are “mad, but honest and principled. I wish them a good depression”. If the position of some hard-core libertarians on this issue is dotty, as is alleged, are their analyses any more dotty than those of the people under whose approving gaze the financial nest-fouling of the last decade was allowed to take place? While there were a few critics among the academic and other trained analysts who were monitoring goings-on, there were plenty who trumpeted models which supposedly proved all would be well.
According to Professor Buiter, the only other type of nay-sayer on Monday was
populist rabble-rousers or, worse, politicians who know better but follow the whims, fancies and passions of their constituents, even when this means that before long the real economy risks falling off a cliff ... They put re-election before the economic health of the nation and the interests of their constituents ... I wish them a rather nasty depression.How dare those elected politicians vote according to the “whims, fancies and passions” of their constituents, when they have experts like Professor Buiter to tell them what to do.
We do not know this action will solve the problem. We cannot be certain it won’t make things worse.
The twenty-first century economy has so far been handled, by both government and corporations, like the decision to invade Iraq: plenty of balls, little brains. Time to take stock and reflect is needed. More emoting, and knee-jerk dramatic and irrevocable action, are almost certainly not.
Maybe the bill — now the Emergency Economic Stabilization Act — will save the global economy. Maybe. But please, no more foot-stamping insistence that parliaments should do as they are told. Remember your Politics 101 course? Separation of powers, and bicameral houses which ‘hold up’ legislation that other people think is unquestionably desirable, are generally thought to be a good thing. It's called democracy.