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Slow Down

Spending $700 billion (which is really $2.5 trillion since you are borrowing the money) to stop a recession—no worse that what we saw in 1990-91 (one quarter of -3 percent growth and one quarter of -2 percent growth) or even 2001 (one quarter of -1.4 percent growth)—seems nutsy. If they want to get this thing passed, Paulson and Bernanke better be more explicit about the risks. ~James Pethokoukis [1]

Via Andrew [2]

As others have noted [3], two days before he wrote the quote above Pethokoukis was issuing dire warnings of 20-30% unemployment [4] and $30 trillion dollar losses unless everyone got with the program.  “It’s time for shock and awe,” he said.  He was especially annoyed with those “MellonHeads,” [1] as he had called them, who argued against the bailout.  But, as I suspected, the alarmists seem to be wildly wrong in what they are saying will happen.  At the very least, there is a much more plausible-sounding projection that sounds very unpleasant, but is far short of catastrophic.  The figures from the quote above come from the forecast of Global Insight:

Although the U.S. financial crisis is bringing sweeping changes to Wall Street, parallels to the Great Depression are overblown. The U.S. economy is far more resilient today, thanks to income support policies, federal deposit insurance to prevent banking panics, and flexible exchange rates. From 1929 to 1933, real GDP contracted 27%, prices fell 25%, and the unemployment rate climbed from 3% to about 25%. Even in our pessimistic alternative forecast, the peak-to-trough decline in real GDP is just 1.5% and the unemployment rate peaks below 7.5%.   

Let’s understand that this would be a sharp and nasty recession, and at the time it will seem small consolation that unemployment has gone up to “just” 7.5, especially if you are one of the people affected by job losses.  In the last week, pro-bailout advocates have frequently chided critics for wanting to cut off our collective nose to spite our face, but if Global Insight’s forecast of what will happen if Congress takes no action is correct it is the proponents of the bailout who will probably be doing more long-term harm than good if they get their way.  That doesn’t mean that absolutely nothing should be done.  It does mean that the bailout simply doesn’t make sense.  Besides being overwhelmingly unpopular, and thus politically radioactive to anyone who supports it, the bailout is probably overkill, an excessive response to an excessively-hyped danger. 

Something that I have noticed over the last decade or so is the insistence, usually but not always by Boomers, that such-and-such a crisis or threat is the greatest we have ever faced.  Put it down to generational self-absorption or self-importance, or put it down to wanting to outdo the experience of their parents, but at several points in the last decade there have been hysterical reactions on both sides of the political spectrum to events that some large part of the population deems the greatest, most important or worst thing to have ever happened.  The threat of jihadism, we have been regularly told, is greater than any threat we have faced before, which is objectively absurd.  Some of the more excitable antiwar activists have repeatedly said that the war in Iraq is the greatest blunder in U.S. history (not so–entry into WWI was), as if to invest the conflict and opposition to it with a kind of world-historical importance that it will remarkably probably not have in retrospect.  As with opposing jihadism without hysterics, it is possible to oppose the war and recognize it as deeply wrong without these theatrics.   Now we are in the midst of a financial crisis, and it is very serious, but it is as if one cannot recognize something to be serious and very worrisome without engaging in neocon-like hyperbole.  If there is a danger of economic contraction, it can’t just be like any old recession.  No, it must be a second Depression, and if you don’t accept this fearmongering you are not to be taken seriously.  When people are trying to scare you like this, it is because they are covering over some weakness in their argument.  They make it seem as if they are trying to get you to focus on real dangers, but they are more often distracting you from their abuses or errors. 

As with the debate concerning the response to terrorism, there is a tendency to want to break down the debate along exceedingly simplistic lines: either you understand how serious the problems are, or you don’t, and even if you do there can be no disagreement about how to respond to the situation.  If you are not on board with every illegal and unconstitutional act of the government to fight terrorists, you “do not understand the threat we face,” and now if you are not on board with one of the largest expansions of the state into the economy in history you simply don’t get how bad things are.  The goal of this framing is always the same: to intimidate and frighten dissenters, increase the power of the state and erode the last remnants of free society in the name of security.  

Free people accept a certain degree of insecurity and uncertainty in order to remain free.  This conflicts with ideals of comfort and convenience, as it always has done, but if there is one lesson that we all ought to be learning from this crisis it is the very simple truth that we cannot have it all.  There are always trade-offs, and to have the degree of comfort and security pro-bailout advocates consider essential we have to trade far too much freedom and cede far too much power.  Given enough time to reflect on the matter, it becomes clear that this is the fundamental question, and we know what the answer should be.  That is why there has been such an effort to rush the decision and keep people from thinking about it, because without the sense of urgency and the fear it inspires it seems unlikely that such a terrible idea would be given a hearing.

16 Comments (Open | Close)

16 Comments To "Slow Down"

#1 Comment By mbtogut On September 25, 2008 @ 11:07 am

[i]but if there is one lesson that we all ought to be learning from this crisis it is the very simple truth that we cannot have it all. [/i]

I agree wholeheartedly with this statement and with the whole post, but we’ve been sold the notion of having it all for so long now in this land of bigger-better-faster-more that relearning the lesson of limits will be long and painful.

The other major problem with selling programs and wars through fear and crisis is that it cheapens the real thing. When every difficulty is hyperbolized as the worst thing to come along, the concept of “crisis” loses all meaning. This is what the Bush administration, which cried “wolf” once too often is now discovering.

#2 Comment By Grumpy Old Man On September 25, 2008 @ 12:31 pm

Recessions do have salutary effects. They lead to correct valuation of overvalued assets, remove inefficient enterprises from the market, and provide an object lesson in the dangers of speculation and economic indiscipline.

Pain has similar uses. It warns us not to overtax our bodies, and to rest when we are injured or ill. Morphine masks pain, but does not halt destructive bodily processes.

Bailouts extend the life of overvaluation of assets and grant a respite to inefficient firms.

Conservatives are wont to moan about the nefarious effects of food stamps and aid to dependent children on the morals of the poor. Welfare for investment bankers can’t be better. The eye of that needle keeps getting narrower and narrower.

Kyrie eleison. Repeat 400 times.

#3 Comment By Adam01 On September 25, 2008 @ 2:12 pm

“Bailouts extend the life of overvaluation of assets and grant a respite to inefficient firms.”

Just so. Can anyone, even our self appointed Masters of the Universe in NY & D.C., really have any idea how much these toxic securities are worth? We’ll know when vulture private equity firms swoop in and pick the bones of these dead companies clean: whatever they pay, that’s what they’re worth.

#4 Comment By Grumpy Old Man On September 25, 2008 @ 2:56 pm

“There’s a market-clearing price for everything.” The gummint will pay more than that. That is, our children will be paying more for the follies of the MOTUs.

#5 Comment By conradg On September 25, 2008 @ 8:13 pm

The argument that any recession we might face without the bailout won’t be all that bad is actually an argument that the bailout is a pretty safe bet for the government to make, if it is done sanely with good guarantees of equity stakes, and fair prices. This is because the real risk of the bailout is that it doesn’t work, and that the government is stuck with worthless securities because the economy has tanked anyway, and people go bankrupt and don’t pay these mortgages. The suggestion here that it’s not all that bad anyway also means the risk of the bailout is virtually nil, and that if anything the government will even make a small profit on the securities it buys once the recession is over, and a big one of no or only a mild recession comes along at all. So if this is the case, we might as well go ahead with the bailout and see it as a short term investment, a hedge so to speak.

Also the idea that the 700 billion balloons to 2.5 trillion because the money is borrowed assumed that the money isn’t paid back for something like 30 years, which seems highly implausible. Treasury rates are about 5% right now, and thus even if it takes 5 years to pay back, which it shouldn’t, that’s ballooning to about 850 billion. People who don’t do math well shouldn’t try to make economic arguments.

#6 Comment By Daniel Larison On September 25, 2008 @ 9:04 pm

If I were the one making the calculations, you might have a point. I’m not, so you don’t.

#7 Comment By Glaivester1 On September 25, 2008 @ 10:53 pm

The argument that any recession we might face without the bailout won’t be all that bad is actually an argument that the bailout is a pretty safe bet for the government to make, if it is done sanely with good guarantees of equity stakes, and fair prices.

conradg, the recession we might face without a bailout may not be that bad, but with the bailout we face a much worse recession. Your argument presupposes that the bailout won’t compound the problem.

#8 Comment By Grumpy Old Man On September 25, 2008 @ 11:28 pm

The bailout will make inflation worse. We’re printing the money for it.

#9 Comment By Daniel Larison On September 25, 2008 @ 11:37 pm

Thanks, GOM. Boosting inflation is just one of the problems that the bailout will cause, but it is a major one and one that is going to make the dollar much weaker. The German finance minister did not declare the end of American economic dominance for no reason. Even taking a socialist’s opportunism and hyperbole into account, the German is right: the dollar is going to take a beating because of this “solution” and that is going to discourage foreign investors from putting their money here. With cost of living already rising, tell it to the average citizen that it is a good thing that his purchasing power is eroding rapidly. This is at best delaying a correction that will simply be more severe later. FWIW, I actually do know something about macroeconomics. Not that it would undercut anything I have said if I didn’t.

#10 Comment By JBraunstein On September 26, 2008 @ 12:03 am

The main point of this bailout seems to be to keep the system afloat as is. That is, the Borrow-Spend system which even stalwart Keynesians agree is unsustainable. How the hell is the consumer economy going to recover without more overextension? Incomes are not going to keep up with inflation. We have yet to see massive waves of defaults on credit card debt, which will come. There is no indication that economic conditions will improve to the point where these debt securities become attractive to private investors. The next asset bubble that all of this newly created money will flow into might not even occur in this country.

Sooner or later, interest rates will have to rise sharply to shore up confidence in the dollar. We have no savings. What will we do then? We’re looking at a deep recession no matter what. Hopefully, we’re also looking at the end of Bretton II, and our government’s drunken, reckless abuse of monetarism. All of the fundamentals suggest the dollar’s reign is almost over. So is our pastime of borrowing to consume, with ever dwindling collateral.

I wonder what comes next?

#11 Comment By Grumpy Old Man On September 26, 2008 @ 3:32 am

*I wonder what comes next?

The last time, it was conscription and rearmament, financed by debt. We militarized ourselves out of the Great Depression.

Let’s make (Burma, Congo, Darfur, Iran, Somalia, Syria, Ukraine–pick any 3) safe for democracy?

Like the Roman, I seem to see “the River Tiber foaming with much blood”.

–Enoch Powell

#12 Comment By JBraunstein On September 26, 2008 @ 10:19 am

But we already have a gargantuan military industrial complex that employs tens of millions. We’re the #1 arms dealer/exporter in the world. I think we already saturate the market.

Are you saying their plan is to make the US into some kind of mindless, rampaging war machine? Sure, that will lower unemployment, but how does it not simply extend and exacerbate the economic problems at hand? After WW2, the Western Industrial world was devastated, and we filled the vacuum in a big way, making us very wealthy. I hope we don’t have to obliterate China and other East Asian countries in order to regain our competitive advantage in production.

Given the current state of affairs, If things happen like you say, we’ll look like North Korea.

#13 Comment By Grumpy Old Man On September 26, 2008 @ 12:37 pm

I don’t think anyone on this ship of fools has a plan.

You don’t have to be a Marxist to figure that conscription can limit unemployment and provide discipline for unruly youth, a foreign enemy can justify suppressing dissent, and arms production financed by colored pieces of paper can yield employment for hoi polloi and profit for the few.

My guess is that if this sort of scenario comes to pass, it will be the libs that do it. Perpetual war for perpetual peace; oligarcy and centralization to defend “democracy,” intolerance in the name of diversity and tolerance.

My rant hormones are storming today. Bailout? Malarkey, stuff and nonense!

#14 Comment By conradg On September 26, 2008 @ 4:10 pm


You quoted the numbers as if they were accurate without double-checking them, I suppose because you’re not very good at that sort of thing. Which makes me kind of wonder what you are relying on for all this evaluation of economic possibilities.

Another example is GOM’s claim, that again you seem to accept without questioning, that the money is just going to be printed up by the treasury, leading to inflation. Simple untruth, easily checked. The money will come, as all deficit spending does, from selling treasury notes. This has economic consequences, certainly, but inflation is not one of them.

The point I’ve been trying to make here – and I’m by no means enthusiastic about the bailout, but I’m trying to look at it from the perspective of a dispassionate investor, evaluating the risks – is that the only real risk to it is that it doesn’t mitigate a recession, or a depression, and the value of the mortgages and properties that back these securities collapse and never returns, and we lose out on a large percentage of that 700 billion plus. I think that’s a very slim possibility, but not one that can be overlooked. The idea that the bailout will contribute to worsening any recession is being floated around by some, but I don’t see much merits in the arguments. Do you?

Now, philosophically and politically, I can certainly see why many would oppose the idea of a carte blanche bailout here. But economically, and by that I mean from the perspective of someone trying to achieve the result that creates or preserves the most wealth/value from this situation for both the government and the overall economy, it seems like a well-packaged bailout would work quite well. The government has more than a “selfless” interest in the welfare of its citizens at stake here, it has the issue of tax revenues to protect from the ravages of a recession, which will certainly drive them down. So risking some of its capital to avoid a revenue-killing recession is not in itself a bad play in the market. Politiically this is not very pleasant, in that most of us don’t like the government bailing out stupid greedy swine like this, but it’s really not about punishing the swine, it’s about achieving the best outcome for the non-swine.

GOM is right that we ended up militarizing ourselves out of the last depression, and let’s hope it doesn’t go there. But it didn’t have to be militarization. One of the big mistakes of the New Deal was not realizing how much deficit spending was really needed to snap the country out of that mess. There’s no reason that deficit spending has to be military in nature. How about spending hundreds of billions on alternative energy production, which has an actual benefit down the line, whereas military spending does not?

#15 Comment By Daniel Larison On September 26, 2008 @ 4:56 pm

I used a blockquote from Pethokoukis, and it was *his* claim about the $2.5 trillion, which I was not endorsing simply by including it in a quote. For the record, I don’t think it will end up costing anything like that. However, I have seen enough credible arguments that most or all of this money is not going to be recovered to be persuaded. Maybe they’re wrong, but I’m not interested in adding all of that to the debt on the chance that we might get some of it back.

I should have been more clear about what I meant when I referred to the inflationary consequences of this plan and what I was saying when I commented. Fears of the effects from the infusion of capital from the bailout have already been driving investors away from the dollar. If the bailout goes ahead and the flight from the dollar continues we will see a rise in inflation. You’re right that the government is going to borrow the money, but it is what they are going to do with what they’ve borrowed that will drive the dollar lower, and that will combine with the already-rising costs driven by high oil prices. Maybe the Fed can get things back under control later, or maybe not. There will be very real negative consequences from this bailout for the cost of living for everyone, and that assumes that it will work as they say it will. So we’re either looking at a nasty correction without the bailout as banks try to deleverage and some fail, or we will see significant inflation, and in my view the latter is much more harmful.

Currency traders seem to think the inflation threat from the bailout is quite real. Take [5], for example:

As officials in Washington hammer out the details of the mammoth bailout package, investors are already weighing in with questions about what impact it will have on the U.S. economy and taxpayers. Among their concerns is the heavy borrowing the government is expected to undertake to pay for the plan – a move that sent the dollar lower versus its main rivals.

“What they’re doing is very, very inflationary … and a lot of people think the dollar is going to get crushed,” said Matt Zeman, head trader at LaSalle Futures in Chicago. “If I’m nervous about putting money in a bank, I’ll go out and buy gold and bury it in the back yard.”

Currency traders are saying this fairly frequently about what effect the bailout will have on the dollar, so I don’t think I was saying anything that was so strange.

#16 Comment By conradg On September 27, 2008 @ 2:21 am


I’m not one to pretend expertise on what the effects of the bailout would be, but it’s highly unlikely that we would get both inflation and recession at the same time, in that the two work against one another. It’s certainly possible that the dollar will fall further, except that it’s already quite low, and it’s certainly possible that inflation will rise, but it’s hard for me to see how it could rise by much, particularly in a recessionary environment. Then again, if there is no recession, then the bailout will have worked, and we won’t be stuck with depressed securities, but will be able to sell them off at cost or even a profit, as long as we don’t overpay for them, which I think is the only real danger of this deal, and why it needs serious oversight.

The point is that the situation is not all that bad, in that there’s a hedge situation here in which we are to some degree protected by the multiple levels of the whole deal. I really don’t know how dangerous the situation is without a deal, but I tend to take the word of disinterested economists that yes, it really is a serious matter, nothing to take lightly, and that doing nothing is actually the most dangerous thing. I certainly don’t like fear-mongering and pushing through bailouts that haven’t got any oversight or accountability, but an intelligently structured one could work as a good hedge in this situation.

None of that changes the overall structural problems with our economy, however. Rising oil prices seem here to stay, and a fallen dollar as well. I’m sorry, but I don’t see internal inflation as a serious danger, and that’s quite a different story than a falling dollar that increases the costs of imports. I could be wrong of course, and there’s a world of people who will bet either side of the coin, which is what these markets are all about. But recession seems far and away a more serious problem than inflation, which has not been a serious problem in some time, and does not describe our internal economic problems very well.

And besides, if we just elect a magical negro all will be well.