1 Boring Old Man

Is the bailout needed?
Many economists say ‘no’

^{A funny thing happened in the drafting of the largest-ever U.S. government intervention in the financial system. Lawmakers of all stripes mostly fell in line, but many of the nation’s brightest economic minds are warning that the Wall Street bailout’s a dangerous rush job. President Bush and his Treasury secretary, former Goldman Sachs chief executive Henry Paulson, have warned of imminent economic collapse and another Great Depression if their rescue plan isn’t passed immediately.}

^{Is that true?}

^{"It’s more hype than real risk," said James K. Galbraith, a University of Texas economist and son of the late economic historian John Kenneth Galbraith. "A nasty recession is possible, but the bailout will not cure that. So it’s mainly relevant to the financial industry." The Paulson plan will get some bad assets off the balance sheets of troubled Wall Street institutions and commercial banks. That may help thaw the lending freeze.}

^{But it wouldn’t reduce the crush of homes in or near foreclosure, said Simon Johnson, a professor at the Massachusetts Institute of Technology. That’s a problem that will surely grow worse if the U.S. economy enters recession, leading to greater job losses, which feed a vicious downward spiral of even more foreclosures and defaults on car loans and credit-card debt…}

^{Coming out of the White House on Thursday, the ranking Republican on the Senate Banking Committee, Alabama’s Richard Shelby, held up what he said was a five-page list of economists opposing the rescue plan. "This is not me. This is economists at Harvard, Yale, MIT, University of Chicago, our leading universities," an exasperated Shelby told reporters. He called the administration plan "flawed from the beginning."}

^{Johnson, a former assistant director of research for the International Monetary Fund, said: "I think the main problem is what they have on the table is not truly comprehensive, and I think it’s probably not decisive for that reason."… What Congress and the administration failed to do, Johnson said, is develop a mechanism to quickly modify distressed mortgages and prevent even more empty homes from being dumped into real-estate markets in freefall. The plan also doesn’t help banks bring in new capital to boost lending; instead many are sitting defensively on their reserves to offset expected loan defaults. "I think the rush that happened this week is unfortunate," Johnson said. "I don’t think it is enough."}

^{Another doubter of the Great Depression theme is Kenneth Rogoff, a Harvard University economics professor, who thinks the intervention may prevent or delay the necessary failure of weak financial institutions. "It is time to take stock of the crisis and recognize that the financial industry is undergoing fundamental shifts, and is not simply the victim of speculative panic against housing loans," he wrote in a syndicated column. "Certainly better regulation is part of the answer over the longer run, but it is no panacea. Today’s financial firm equity and bond holders must bear the main cost, or there is little hope they will behave more responsibly in the future"…}

^{"Last week we came real close to a financial economic meltdown because of the run on money market funds, resulting from the bankruptcy of (investment bank) Lehman Brothers, and I think insuring the money-market funds was enough," said Ed Yardeni, a veteran Wall Street analyst. Last week the Treasury announced a $50 billion insurance plan for money market funds, which restored confidence in them. "It wasn’t necessary to move to Plan B." Doubting the financial Armageddon scenario, Yardeni said another measure that could have the same effect as the $700 billion rescue plan is simply to change accounting rules for bad assets — mostly bonds with mortgages as their collateral.}

I don’t understand economics. It purports to be a mathematic, but what economists talk about is group psychology. There are indices that they follow like the weather report, things like "consumer confidence," unemployment, third quarter this-and-thats, but the interpretations of these things seems more like something from a ouija board than a science, at least to me. That said, there are apparently a number of economists who question not just whether the bail-out will work, but whether it might do harm. I certainly believe that the Bush Administration’s track record is to go overboard, naively. I hope the people in Congress are listening to these alternative thoughts. For example, Yardeni thinks this crisis has already been weathered. That is actually a very interesting thought. Simon Johnson thinks the bail-out is misdirected altogether, not directed at the immediate problem of the glut of proprerty being dumped on the market. It makes my head hurt to ponder it all, but it does seem that it is the economists with their ouija boards that need to be debating our response…