Monetary Policy

How Elite Opinion is Forged in a Time of Crisis, Bailout Division

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U.S. News and World Report finance whiz James Pethokoukis, just a couple of days ago, knew that the financial disaster threatening us was such that Paulson's plan was a must—"It's time for shock and awe." Why, he'd even done the math (a bunch of wild guesses) to prove it–presenting two different scenarios, one with a "do-nothing" cost of $15 trillion over four years, and another of $26.8 trillion over four years.

Today, someone else, the folks at Global Insight, made some other wild guesses, as Pethokoukis notes:

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%.

Me: I'm sorry. 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.

The "me" in that block quote is Pethokoukis, not me. Now, Pethokoukis has had to think, talk, and write about all this stuff professionally for a while. Check his bio: He's

the money and politics blogger for U.S. News & World Report , where he writes the monthly Capital Commerce magazine column. Pethokoukis is also the assistant managing editor of the magazine's Money & Business section. He has written for many publications including the New York Times, the American, USA Today, Investor's Business Daily, and TCS Daily. Pethokoukis is also an official CNBC contributor and appears frequently on that network's Kudlow & Company, Power Lunch, and The Call shows.

This is really not meant to bag on Pethokoukis. This sort of mathematized prediction of economic disaster is pretty much impossible to be sure of. Still, if he is able to have his firm and considered and mathematized opinion about what to do whiplash so wildly from day-to-day based on the last thing he heard, well, without overestimating the persuasive power of U.S. News and World Report, this is another reminder of how much of an absolute fantasy it is that the members of Congress, who generally don't have to spend much time thinking, talking, and writing about these matters on a sophisticated level, can make even half-educated guesses about how to best "manage the crisis."

The really sad thing is that, doubtless aware of that on some level, they are more apt to just agree to hand absolute power over to the likes of Paulson, and "making sure big financial institutions pay little price for their mistakes right now and tomorrow's another day" will remain the dominant imperative.

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  1. $700 Billion Dollars! We all know it’s going to be more than that.

    US population is about 300 million people.

    $700E9 / 300E6 = $2,333 per person.

    Is this the best use for this money?

    How much will a recession really cost?

    How about doing the Bush Tax Rebate? thing again to avoid the next recession? (this is personally my favorite).

  2. Don’t anybody panic, but what number comes after a trillion?

  3. “…if he is able to have his firm and considered and mathematized opinion about what to do whiplash so wildly from day-to-day based on the last thing he heard…”

    Ever seen a fish flop about on the deck, suffocating, trying to get back in the water?

    This is that, and that is this.

    It’s hard to be the resident financial guru, when not even an omnipotent being could figure out something as nonsensical as shady backroom deals and insider accounting.

    That’s why there’s this thing called a free market to sort things out in a distributed manner. Free markets are to crises as peer-to-peer networks are to massive downloads. Central planners can’t plan adequately when there’s too much guesswork and unknowns involved just like a middle school Algebra student can’t mathematically solve a word problem when the answer is “Not enough information.”

    Waiter, check please.

  4. Here’s another way elite opinion comes to be:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aRYGsEEkfHOQ&refer=home

    In this article, a mortgage securitization expert strongly asserts that the bailout won’t end up costing taxpayers a thing, and is urgent and essential.

    Near the end of the article, the expert refuses to comment on whether he intends to have his own firm bid to be one of Paulson’s managers for the fund.

    Remember, the bailout legislation allows Paulson to appoint – and compensate – managers for the bailout process without being subject to the federal bidding process and without judicial review. There are gigantic fees to be earned here.

    I imagine it’s pretty easy to get everyone to agree that the plan is a great idea, if the guy proposing the plan will have the unilateral power to reward people who support the plan and punish people who won’t.

  5. I want my two dollars!

  6. Uh, my brother, this morning, got his arm caught in the microwave, and my grandmother, she dropped acid and freaked out and hijacked a school bus full of…penguins.

  7. but what number comes after a trillion

    A trillion and one, if you’re using whole numbers.

  8. Are you kidding me. This bail out is a joke. To hell with the stupid wall street banks. What about the average joe American who is struggling to keep food on the table. Enough is enough!

    Jiff
    http://www.Privacy-Center.net

  9. how much of an absolute fantasy it is that the members of Congress, who generally don’t have to spend much time thinking, talking, and writing about these matters on a sophisticated level, can make even half-educated guesses about how to best “manage the crisis.”

    I’m guessing too many of them aren’t making even half-educated guesses, etc., but are spending their brain cells on issues like “how is this polling?,” “how can I position myself to avoid taking a hit if things go wrong?” and “how can I skim for my buddies?”.

  10. I’m guessing our political elites are letting the lobbyists explain it to them, same as everything else.

  11. Ah, yes. I occasionally ask for my $2.00 and get blank looks. That’s sad. Of course, I get really irate when I ask for the Cones of Silence and get equally blank stares. I mean, come on. I don’t care when you were born.

  12. for the record, I am sticking with my forecasts. Privately, Wall Streeters are far more pessimistic than their public forecasts. They sound a lot more like Jim Cramer.

  13. This issue, like so many others, reveals the utter folly of the judiciary presuming that all legislation is valid and constitutional and obligating those that would seek the invalidation of legislation with carrying a nigh near impossible burden. The courts are fond of saying it is not their position to question the wisdom of the legislature. Funny, they do not have any problem questioning the wisdom of the framers, do they?

  14. Is he doing probabilities? The stuff that is based on assumptions or as I like to call em’ “made up forecasts”.

  15. Privately, Wall Streeters are far more pessimistic than their public forecasts. They sound a lot more like Jim Cramer.

    And Wall Streeters have done a fantastic job of getting things right over the past 5-10 years. I’m not kidding, they have. It’s just that what they’ve gotten is what’s right for Wall Streeters, and not what’s right for the overall economic health of the nation. If they get bailed out here, they definitely got it right, wouldn’t you say?

  16. As I said last week, this bailoout is socialism for the rich. Any argument to the contrary, is ignorance personified.

  17. Sorry your mom blew up, Pro Lib.

  18. Maybe Bush, Paulson & Co. should need a few of these to push Push PUSH their bailout: http://www.youtube.com/watch?v=UpkJoQUFqXM

  19. Did anybodt else see CNBC this morning? Warren Buffet invests/bets 5 billion dollars on Goldman sachs….then he does a 15 minute infomercial explaining how badly we need to pass Paulson’s plan….he says yes his investment was made assuming that “congress would do the right thing” and proceed with the bailout plan!

    And the analysts all pretend like there is no bias at all in his statements! insane.

    He says too many people are contracting their leverage so the government(taxpayer) must extend its leverage. He also talks romantically about how the CEO of Goldman taled with him extensively when he was a 9 year old boy ad what great folks the people at Goldman are.

    I was so touched it made me want to pledge to donate 20% of my son’s lifetime earnings to Goldman Sachs.

  20. joe, yeah, thanks. I guess she won’t be able to eat any spicy foods for a while. Just like America.

  21. Gabe-

    Why do you think that Buffet is against ending death taxes?

  22. If Buffett’s buying, we should be buying too.
    Justin Freeman, how do you earn your living?
    I’d like to know so I, too, can get into some career where a reasonable standard of living can be acquired without being at all involved with the banking and financial “industry.”

  23. And Buffet allegedly said, “I’d do it (the bailout) with my money, but I just don’t have enough.” If he was using his own money, you can be goddam certain he wouldn’t pay the “hold to maturity” price.

    Anybody who thinks Buffet has a heart of gold, or the interests of anyone but himself in mind, hasn’t been paying very close attention.

  24. “Don’t anybody panic, but what number comes after a trillion?”

    I think it’s a gagillion or something.

  25. Don’t anybody panic, but what number comes after a trillion?

    Godzillion!!!

  26. Zodneellion.

  27. Don’t anybody panic, but what number comes after a trillion?

    At this rate, number 2 comes next.

  28. Don’t anybody panic, but what number comes after a trillion?

    1,000,000,000,000,000 = 10^15 = one quadrillion or one thousand trillion http://en.wikipedia.org/wiki/Names_of_large_numbers

  29. Now that’s a real shame when folks be throwin’ away a perfectly good 700 billion dollars.

  30. Brother, can you spare a terrabuck?

  31. “Don’t anybody panic, but what number comes after a trillion?”

    A fuckton

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