Economists Reach Consensus (or Not)

Katherine Mangu-Ward | October 3, 2008

From around the econoblogosphere (sorry for that ugly coinage), semi-consensus about consensus:

Eric Posner at Volokh:

Do economists oppose the bailout bill? No! You might think otherwise from various incautious commentaries, including the economist’s letter written a while back. (The letter said "go slow"; it didn't say "do nothing.") And it is true that most economists don’t like the original Paulson plan, and also don’t like the plan passed by the Senate. But the view that we are currently in a serious financial crisis—the worst since the Great Depression—is, as far as I can tell, unanimous. ...The idea that governments should address financial crises by injecting liquidity in the system is not some new-fangled idea dreamed up by socialists, but conventional wisdom, proved again and again by experience, going back many decades. The problem is that every economist has his own theory about the proper solution.

Alex Tabarrok at Marginal Revolution:

The consensus among economists is now clear, the best strategy for dealing with the financial crisis is to recapitalize the banks that need recapitalization.  Paul Krugman, John Cochrane, Luigi Zingales, Douglas Diamond, Raghuram Rajan and many others all advocate some form of recapitalization as do Tyler Cowen and myself.  Krugman would prefer a recapitalization in the form of nationalization....The consensus policy of economists would put most of the burden of adjustment on politically powerful holders of equity and bonds.

There is also a consensus among economists that the bailout bill is not the right policy.  None of the above economists, for example, is enthusiastic about the bailout.  

Lynne Kiesling at Knowledge Problem:

Fast recapitalization, removing the signaling penalty by having the government require banks to stop giving dividends in the short run ... those are the kind of policies that economists have been discussing, fleshing out, and encouraging over the past two weeks. Of course, the challenge to those proposals is that the parties who end up paying are precisely those firms and industries that are politically powerful.

Comments

|10.3.08 @ 4:29PM|#

What's that old saw? Ask 10 economists what to do and you'll get 14 different answers?

JP|10.3.08 @ 4:34PM|#

You snipped the Tabarrok excerpt just before the best part: "My bet is that all of us think that the bailout has a substantial likelihood of failing. The support that exists is born out of hope and fear not judgment and experience."

Lee Cruz|10.3.08 @ 4:39PM|#

How do you prevent a wreckless expansion of credit from correcting? With another expansion of credit of course! Its genius, it's our only hope, 9 out of 10 economists agree!!!!

|10.3.08 @ 4:42PM|#

Hey, if the bailout fails, they'll just conjure another trillion dollars out of thin air.

"He said to the man, he wanted many, many thousands of green people from history times."

Don the libertarian Democrat|10.3.08 @ 4:52PM|#

David Friedman:

https://www.blogger.com/comment.g?blogID=19727420&postID=6127314974973368481

"The bailout is not a way of preventing the loss of value. The loss (or transfer) of value occurred when people made bad mortgage loans. What happened more recently was the recognition of that loss. All the bailout can do is to shift the loss from some people to others, from the stockholders and creditors of firms that are now effectively bankrupt to the taxpayers."

|10.3.08 @ 4:52PM|#

The Dow Jones Industrial Average seems to have a pretty accurate take on the bailout: it sucks.

|10.3.08 @ 4:53PM|#

Assume a can opener.

|10.3.08 @ 4:58PM|#

The Dow Jones Industrial Average seems to have a pretty accurate take on the bailout: it sucks.

DJIA 10325.38 -157.47 (-1.50%) Oct 3 4:11pm ET
Think of how bad it would have been if we didn't pass this bill.

|10.3.08 @ 5:00PM|#

Will no one rid me of this troublesome government?

JP|10.3.08 @ 5:01PM|#

Think of how bad it would have been if we didn't pass this bill.

It's the perfect defense of a perfect scheme. Just like, "Think of how many terrorist attacks would have happened if we hadn't trampled on the Fourth Amendment."

|10.3.08 @ 5:04PM|#

Serious question: Are we more likely to experience terrorist attacks when we're perceived to be down? Just to make all of us more nervous about the future than we already are.

|10.3.08 @ 5:06PM|#

The idea that governments should address financial crises by injecting liquidity in the system is not some new-fangled idea dreamed up by socialists, but conventional wisdom, proved again and again by experience, going back many decades.

Actually it's a very old-fangled idea dreamed up by John Maynard Keynes, and expressly contradicted again and again over many decades of experience. Keynesians are not socialists, but they go to the same level of hell.

|10.3.08 @ 5:21PM|#

Normally when I get fucked this hard, I like it.

|10.3.08 @ 5:24PM|#

I wonder what Bush said as he signed the bill? "This ensures my legacy as the worst president of the modern era. Next, I will begin working towards my other great scheme--to cause a civil war during the next president's term."

|10.3.08 @ 5:26PM|#

Congress has failed. Completely. A Congressman says, 'this is the worst I have seen in my career'. I wonder, what has he been doing during that career

This 'bail' for the economy is the SUM TOTAL of Congress's career actions. This is what they have done for us.

Goodbye Congressman. Goodbye Senator. Don't come home, you're a disgrace.

|10.3.08 @ 5:32PM|#

The pols are covering their asses before the sun sets today by saying, "it's not a good bill, but something had to be done." Six months from now when their folly is evident and they face criticism (it could happen!) they'll say, "well, we knew at the time it was a bad bill, but things could be worse." The perfect alibi. Today's "revote" on the bill had me reading "recapitulation" in the above article instead of "recapitalization."

Kolohe|10.3.08 @ 5:35PM|#

Serious question: Are we more likely to experience terrorist attacks when we're perceived to be down?

Serious answer: no. I doubt either Osama bin Ladin or Timothy McVeigh* gave a whit about the state of the economy.

*I always found it odd that McVeigh is one of the few bad guys in history not to be known by three names.

|10.3.08 @ 5:49PM|#

I always found it odd that McVeigh is one of the few bad guys in history not to be known by three names.

Phonetically, that triple consonant at the begining of his name gives him the triad you're looking for. Timothy-Mac-Vey

|10.3.08 @ 7:31PM|#

I've said it once I'll say it again.

Economists are great a explaining what has happened, so so at explaining what might happen, and terrible at predicting what will happen.

This is a case where lots of very smart people can't think of any other way out of the problem and therefore assume nobody else can either.

|10.3.08 @ 8:28PM|#

"Go ahead and flap your arms when you jump, if you want, but I still don't think it's the best way to get off this roof."

|10.3.08 @ 11:11PM|#

I predict that upon the inevitable recovery of the credit market and the economy in general (further away from today than it was from just a week ago), the idiots on capitol hill and their starry-eyed apologists in the mainstream media will gush about how they saved America, and how they were glad that no one listened to those naysayers who opposed socialized risk and privatized reward.

|10.4.08 @ 1:57AM|#

No, they will say "Now that we've socialized risk, lets socialize the rewards too."

That was the POINT of the bailout all along.
That's why more Democrats than Republicans supported it. That's why the mainstream media was so flipping eager to see it happen.

|10.4.08 @ 10:39AM|#

The bailout is clearly a good solution for the people being bailed out (gee, I wonder where the idea came from?) But will it do anything for the economy? That is very unlikely.

The treasury could do some good if it simply bought short term bonds on the open market. This would lubricate the market and almost certainly turn a profit (huge spread between t-bills and commercial paper).

|10.4.08 @ 10:50AM|#

It won't help the economy, and has a ton of other bad implications involved. I just got to see Bill Maher's Religulous last night, and a senator whose name escapes me at the moment said "You don't need to take an IQ test to get on the senate". This is obvious. What was the stat? 6% of congessmen have economic backgrounds?

|10.5.08 @ 1:11PM|#

Consensus is the refuge of scoundrels. Fact is this crises is the personified refutation of Keynesian thought.

The government has pulled put every single Keynesian rabbit on this one and it hasn't worked. What economists need to start doing is stop looking for consensus like a bunch of retarded social scientists and start making new theories and testing them against data, like actual scientists.

Michael Ejercito|10.5.08 @ 3:05PM|#

Actually it's a very old-fangled idea dreamed up by John Maynard Keynes, and expressly contradicted again and again over many decades of experience.

How was he wrong?

JMR|10.5.08 @ 6:03PM|#

I love it when Episiarch makes the most sense...

Steve Verdon|10.6.08 @ 1:01PM|#

The first comment at that Volokh Conspiracy is worth noting,

Christopher Phelan (mail):
I am one of the signers of the petition. This bill is much worse than Congress doing nothing. The Fed has a playbook for this sort of crisis. Lend money (and take assets to back the loans) to any and all financial institutions.

Yes, many of us have different answers on what to do eventually. But the right thing to do right now is nothing. This stampeding of Congress into acting now now now is madness.

Indeed.

Part of the problem, in fact the largest part of the problem, with the Great Depression was the government/Fed's decision to stick with the gold standard and thus contract the money supply by over 20%. We know this now. Ben Bernanke knows this. This mistake will not be made again. Look at what the Fed is doing now, injecting money into th system--just the reverse to the above.

I know the gold bugs will come out saying, "No, no, no! We need a sound currency." Two things,

1. Nobody is advocating hyper-inflation.
2. How to explain the Great Depression and that things got better as countries went off the gold standard.

This idea that only a gold backed currency is sound is just silly, IMO.

Armchair Economist|10.6.08 @ 3:07PM|#

"...Look at what the Fed is doing now, injecting money into th system--just the reverse to the above."

"1. Nobody is advocating hyper-inflation."

By definition, injecting money into the system is inflation. It only becomes hyper when you lean a little bit too hard on the lever.

Granted, I'm somewhat of a neophyte, but I'm not aware of any hyper-inflationary gold-backed currencies. I could name a couple of fiat ones though.