Economics

The Reversals of Market Wisdom

And vice versa

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Remember when Treasury Secretary Henry Paulson warned us, back in September, that the economy was about to collapse unless Congress immediately authorized him to spend $700 billion on "troubled assets" held by banks? Remember when he said banks would never lend again as long as they remained saddled with these bad investments?

You do remember? So it's not just me. I was beginning to think I had dreamed the whole thing. In November, Paulson said the Treasury Department would not be buying any troubled assets after all. Instead it would use the $700 billion to buy the banks themselves, which I could almost swear Paulson had said was a bad idea a couple of months before. Presumably the Bush administration continued calling the effort the Troubled Asset Relief Program for the sake of the acronym, which suggests a cover for something unsightly or embarrassing.

The TARP turnaround is not the only bewildering reversal of economic wisdom we've seen in recent months. Here are some of the more memorable:

Loose credit is bad, and so is tight credit. Loose credit encouraged people to buy houses they couldn't afford, which raised defaults and foreclosures, which undermined the value of mortgage-related assets, which made financial institutions that held such assets cut back on lending. The solution, according to the Bush administration: looser credit.

Moral hazard is bad, except when it's necessary. Government guarantees, such as the implicit commitment to bail out the congressionally created mortgage companies Fannie Mae and Freddie Mac, encouraged lenders and investors to take bigger risks than they otherwise would have, contributing to the collapse of confidence in financial institutions and the credit crunch. In response, the Bush administration offered more bailouts—of banks, insurers, and homeowners—and raised the limit on deposit insurance by 150 percent. President Obama wants to bail out carmakers too.

Rising prices are bad, and so are falling prices. As recently as mid-August, we were worried about runaway inflation. In an article headlined "Higher Costs Are Taking a Toll on Business," The New York Times reported that "rising prices have seeped into much of the economy, led by higher costs for food and energy." At the end of October, under the headline "Fear of Deflation Lurks As Global Demand Drops," the Times warned that reduced consumer demand could lead to "persistently falling prices," "suffocating fresh investment and worsening joblessness for months or even years."

Rising home prices are bad, and so are falling home prices. As home prices rose through 2006, newspapers across the country ran stories bemoaning the lack of "affordable housing." When prices started falling, newspapers across the country ran stories about the tragedy of negative equity and the financial havoc caused by the assumption that home values would keep climbing forever.

Rising oil prices are bad, and so are falling oil prices. Last summer, with crude oil going for more than $140 a barrel and gasoline over $4 a gallon, politicians were eager to do something about rising oil prices, which made food and a wide range of other products more expensive. As I write, the price of oil is less than $50 a barrel, but instead of celebrating we're supposed to worry, because the price reflects fears of a long worldwide recession.

Consumer spending is bad, except when it's good. Until recently, economists bemoaned the nation's low saving rate, warning that Americans were living beyond their means, enjoying a spending spree subsidized by foreign capital. Now the problem is that we are spending too little, saving or paying down debt instead of buying stuff we don't need and thereby stimulating the economy.

Feeling confused, anxious, uncertain? Well, cut it out. That sort of thing is bad for the economy. If you want to shorten the recession, you'd better be confident and optimistic. Just don't overdo it.

Senior Editor Jacob Sullum is a nationally syndicated columnist. © Copyright 2008 by Creators Syndicate Inc.

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  1. There has grown up in the minds of certain groups in this country the notion that because a man or corporation has made a profit out of the public for a number of years, the government and the courts are charged with the duty of guaranteeing such profit in the future, even in the face of changing circumstances and contrary public interest. This strange doctrine is not supported by statute nor common law. Neither individuals nor corporations have any right to come into court and ask that the clock of history be stopped or turned back, for their private benefit.
    Robert A. Heinlein

  2. Henry Paulson is a tool.

    I’m not endowed with a sense of confidence in the next person appointed to his office.

    That is all.

  3. Oil prices are falling really fast. They are expected to be below $40 for at least a few months. They may even be below $35 real soon now.

    http://biz.yahoo.com/ap/090120/oil_prices.html

    Hooray supply and demand.

  4. Did Heinlein really write “not supported by statute nor common law”? That’s a pretty big clinker for someone of his stature.

  5. “Loose credit is bad, and so is tight credit.

    Moral hazard is bad, except when it’s necessary.

    Rising prices are bad, and so are falling prices.”

    Yeah, and if it’s too hot, you’ll burn up, and if it’s too cold you’ll freeze! Go figure! Life is so fucking mysterious!

  6. This is a repost right? I can swear I read this here before.

  7. Did Heinlein really write “not supported by statute nor common law”? That’s a pretty big clinker for someone of his stature.

    I’ll answer myself, after a short googling: no, he did not, he wrote “or”, as you’d expect. But someone misquoted him once, and the misquote has spread better than the original.

  8. But he could have said, “neither supported by stature nor common law,” correct?

    I recall NORs from Digital Design. A NOR B == ^(A || B).

  9. But he could have said, “neither supported by stature nor common law,” correct?

    Sure. He also could have said “Shirt Boy is teh hot.”

    To be pedantic here, your alternative should be “supported by neither statute nor common law”, or better, “supported neither by statute nor by common law.” Either one preserves the parallel. But the (correct) original says it best.

  10. Oil prices are falling really fast. They are expected to be below $40 for at least a few months. They may even be below $35 real soon now.

    Tell someone here in Seattle as gas prices are shooting back up to over $2.10 per gal.

  11. Yeah, and if it’s too hot, you’ll burn up, and if it’s too cold you’ll freeze! Go figure! Life is so fucking mysterious!

    But the government will make your porridge juuuuuuuuuuuust right. You know, take the mystery out of life.

  12. But the government will make your porridge juuuuuuuuuuuust right.

    That is if you grease the right person’s pocket. I like my porridge hot. So I think I’ll have porridge temperatures regulated to just my style.

  13. Actually, deflation can be problematic if it proceeds too quickly quickly and causes and makes it infeasible to borrow.

    Similar with loose credit/tight credit.

    I hate to agree Vanneman, but Jacob Sullum is below his normal performance on this.

  14. However, hurrah to Sullum for calling bullshit on the “problem” of falling oil and house prices. Though I would point out that it’s been mentioned here before.

  15. Economist is so cruel and heartless. Falling oil prices are causing corrupt and socialistic regimes like my own to lose their chief means of support.

  16. Speaking of market wisdom, the American and world markets celebrated the Obama inauguration today by tanking.

    Down Jones down four percent, and closes below 8,000. Looks like the bottom wasn’t really the true bottom.

  17. Mike M.
    Although I’ve expressed my dislike of Obama numerous times, I don’t think his inauguration caused the stock market to tank.
    If it was going to happen, it would have happened when he was elected.

  18. I think the stock market tanked cause they are trying to mooch more money off the government.

    You get more of what you reward and less of what you punish. And we’ve been rewarding stock market panic and bank failures lately.

  19. If it was going to happen, it would have happened when he was elected.

    It did.

  20. The copyright on this piece is 2008 — Why are you running month-old retreads on a topic which is an active current controversy?

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