Alex Tabarrok at Marginal Revolution writes:
Count me among those not enthusiastic. My grudging support is not out of fear, per se--that's too strong a word. Rather, I am convinced that we're in for a bumpy ride either way, and even a suboptimal plan like this has the potential to make the ride less bumpy. Furthermore, I think that the moral hazard risks are small in the short term, and there is plenty of time to deal with the long term later.
But what is done is done. Payrolls fell another 159,000 in September. The unemployment rate did not rise this month, but it will catch up in time. And let's be clear once again. This bailout bill will not prevent a recession. As James Hamilton says, that's a "done deal". This bill will not restore calm to the financial markets either. The best we can hope for out of this bill is that it can help facilitate the revealing of information in the markets sooner than would take place without it. That might prevent an unnecessarily protracted downturn.
You won't find me celebrating this bill, but I am looking ahead with anticipation to see if it can get counterparties trading with each other again. If it can do that, it will achieve some measure of success.
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. In my view, there is still plenty of private money to buy banks at the right price and my preferred model is the FDIC leading a speed bankruptcy procedure, as was done brilliantly with Washington Mutual (Cochrane also supports this model.) In the middle are most of the others who have a variety of good ideas to require the banks to raise equity in various ways.
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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. 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. Nevertheless, the political consensus is that a bailout is what we will get whether it is likely to work or not.
Count me among those not enthusiastic. My grudging support is not out of fear, per se--that's too strong a word. Rather, I am convinced that we're in for a bumpy ride either way, and even a suboptimal plan like this has the potential to make the ride less bumpy. Furthermore, I think that the moral hazard risks are small in the short term, and there is plenty of time to deal with the long term later.
But what is done is done. Payrolls fell another 159,000 in September. The unemployment rate did not rise this month, but it will catch up in time. And let's be clear once again. This bailout bill will not prevent a recession. As James Hamilton says, that's a "done deal". This bill will not restore calm to the financial markets either. The best we can hope for out of this bill is that it can help facilitate the revealing of information in the markets sooner than would take place without it. That might prevent an unnecessarily protracted downturn.
You won't find me celebrating this bill, but I am looking ahead with anticipation to see if it can get counterparties trading with each other again. If it can do that, it will achieve some measure of success.
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