The obvious lesson of the rejection of Paulson's plan

It is so obvious that I am puzzled why no-one is talking about it.  If so many House members voted against the plan so as not to run afoul of their local constituents, it must be the case that those constituents are not feeling the crisis in their pocketbook (yet), that they are not nearly as panicked about the situation as most economists are, that they are simply unconvinced that drastic measures are called for--or some combination thereof.  A corollary is that Washington, New York, and the economist community collectively have not been able to tell a convincing story about how badly all this will turn out to be for Main Street.  All the talk about the credit crunch and collapse in retirement savings remains apparently too abstract for most people.

It is possible that the person on the street knows something that most economists don't.  Perhaps the crisis will remain largely a financial one and the real economy will be spared the worst.  Casey Mulligan thinks the people are right and the economists wrong, and he makes a number of good arguments.  But I am afraid a full blown financial crisis presents a different situation from the kind of historical episodes Mulligan's evidence draws on. In any case, if Congress fails to reverse itself soon, we will have the opportunity to test this theory. 

How do you feel about taking this particular gamble? I am not sure I feel good about it. 

Comments

[Russell Pittman]

A corollary of the public being unconvinced of the seriousness of the situation might be the public's demand that before they will risk more of their money on this, they must be convinced that the Wall Street crowd responsible pays a price as well. Even Irwin Stelzer in the current New Republic argues that "The New Capitalism is not rejecting high incomes; it is merely demanding that they bear a reasonable relationship to the value produced by their recipients -- which is what should happen in a properly functioning economy anyway." Though I must admit that I cannot always tell when Stelzer is speaking ironically and when he is not.

[E.]

An alternative view:

People on 'main street' are even more concerned about the economy than economists and think a total financial meltdown is inevitable. Therefore, they think a 'bail out' will have no or very limited impact in the long run. They have already seen considerable govt interventions, while markets have just kept falling and firms continued going under. Hence they are afraid of spending another 700 bn on something that they don't think will fix the problem.

Maybe also Congress think a total meltdown is inevitable, and that is why it did not pass. On the one hand representatives would like to see something pass (to show action). On the other hand, representatives are afraid that when they stand for reelection there will have been a total financial collapse anyway, and the 700 bn bailout will be seen as 'wasted'. Hence, the majority of representatives would like to see a bill passed, but at the same time, they would like to show their vote record as having voted against it (in case the economy collapsed). It is unlikely that this bill will be known as the bill that 'saved the economy'. It is more likely to been known as the 700 bn bill with no or only temporary effect. Therefore, representatives may want to be on record as having voted against it.

[David in Nashville]

I think that the reason economists, etc. have not been able to tell a compelling story is simply that people don't see a problem for it to explain. With a few exceptions, there have been no runs on *their* banks; none of *their* money-market funds have been forced to close. There are anecdotal reports of a credit crunch starting to affect businesses around the country, but they remain just that. Last week here in Nashville a representative of Regions Bank [the biggest local bank] insisted that the situation affects no one here. Essentially, from here Wall Street looks like just another troubled industry, like autos; tough luck, but you guys brought it on yourselves, and you should take the consequences. The notion that the economy might *depend* on the credit these guys manage is just too opaque.

[Per Kurowski]

It might also be that the more serious the crisis looms the more serious and the more credible must the response be and the Paulson plan just failed to convince on both counts.

I have heard some very convincing arguments presented for making many reverse auctions for a percentage of many different tranches of many issues, so as to help to find a market price and though sometimes you might in fact be better off enjoying the bliss of ignorance I would tend to agree with that. But if that is what the plan wants to do, why on earth does it not spell it out loud and clear?

[Neil T. Skaggs]

Perhaps the "person on the street" doesn't believe the Paulson plan is the correct approach. This "person" may be misled by the likes of Lou Dobbs, but it's possible that the resistance is based on a modicum of sound analysis. When economists of the stature of Laurence Kotlikoff and Perry Mehrling suggest a relatively low-cost way to achieve a "bail-out" and our elected representatives don't see fit to adopt it to any significant degree, one has to wonder about the wisdom our representatives are showing.
Further complicating the process is the well-known fact that many of our current saviors are up to their ears in campaign cash accepted from the agencies they were supposed to be overseeing. (Even a presidential candidate stands at number 3 on the Freddie/Fannie contribution list.) I can't say I blame the "person on the street" for having doubts about the sort of plan the Barney Franks of the world might sign off on.

[Tucker]

The person on the street probably doesn't realize how often they interact with credit markets or understand why they are important. People who generally avoid running a balance on their credit cards and aren't looking to buy a car, college education or house (or have a fixed rate mortgage) aren't going to be worried about the dramatic rises in interest rates that will result. The economists haven't adequately connected the credit market problems to the rising unemployment.

[lark]

I think the person in the street has lost faith in economists because most did not see this coming and in fact most cheerleaded this whole sorry deregulatory episode.

[Laurent GUERBY]

lark you're right.

About two economists out of tens of thousands were able to detect the most obvious price bubble of the past two centuries: Dean Baker and Nouriel Roubini.

If that fact doesn't demonstrate that you're better off going to listen some $1 crystal ball fortune teller rather than any economist to define public policy, what will?

As Dean Baker has been repeating for a while: how can we trust "top" economists and managers (same school anyway) to fix the mess they were unable to see in the first place?

Household debt in the USA went to 50% to 100% of GDP in a few years, what are economists talking about 100% of the time? Government debt!!! Which has not moved in any significant way and is so far from any significant danger level that it's just ridiculous.

Number of jobs going down, population going up, and unemployment (defined by economists)? It goes ... DOWN!!! The street man definition of unemployment without the fake stuff about active population has been way better than the economist one for a few decade, yet no economist notices it. Brainless?

Inflation numbers? Where's the detailed price data and detailed "hedonic" data? Hidden by ... economists, again, and for absolutely no reason.

Free trade? Well but with intellectual property says the economist. A logic contradiction? Yes for about everyone except ideology-based economists ... again.

[Mike D.]

The people on Main Street aren't in favor of the bailout because the bailout is for the people on Wall Street. If the $700 billion bailout was in the form of vouchers that could be used to pay mortgage payments it would certainly be more palatable to the average person. I'm not advocating this kind of approach (yet) but some sort of bone needs to be given to the average person to make the bailout feels like a concrete solution that applies to them.

[Think MPS]

I think you are partially right - people just aren't yet feeling it yet, or at least not enough to overcome the rest of it - that they are still pissed off at the idea of taxpayer money used to bail out those who they see benefiting from something they themselves haven't gained from (save perhaps low prices at walmart).

What do you think of Thom Hartmann's STET idea? (Security Turnover Excise Tax) http://www.thomhartmann.com/index.php?option=com_content&task=view&id=998&Itemid=1

[Per Kurowski]

Laurent GUERBY says "As Dean Baker has been repeating for a while: how can we trust "top" economists and managers (same school anyway) to fix the mess they were unable to see in the first place?"

And I make the same question about our financial regulators. How can we trust the regulators in Basel who in order to get risk out of the banks created the minimum capital requirements for the banks that drove risk elsewhere; and that nominated some credit rating agencies as their official risk surveyors when doing so they must, or at least they should have known this would create the mother of all systemic risks, to get the banks back on track?

[Laurent GUERBY]

Per Kurowski, lots of economists are employed by ... banks. Should you listen to them to regulate ... banks?

Obvious answer?

[vigneron]

Bonsoir Cher Monsieur?
Dear Mister Rodrik,

What's going wrong "sur la terre" ?
Why do we (all) forget that trees can not reach the sky ?
Profits, High one day and "down" today...
Some want to write the storyboard and tell us what they would have done...

Bonsoir,

Yvan

[donna]

We are unconvinced because we didn't make billions of dollars dealing in bad loans and suspect financial instruments, and we don't want to have to pay for their losses.

It's really simpler than you think.

[donna]

Besides, to those of us that do understand it, it is obvious the bailout doesn't work and isn't going to work. It merely delays the inevitable. Banks are not going to magically become solvent with the bad loans off their books because they have NO profits to make up for it, unless the Treasury pays more than the bad assets are worth.

I don't pay off idiot relatives gambling debts, either, although I am currnetly paying a friend's car loan since he's been out of work for a year.

You want a bailout? Pay off my friend's car loan and find him a job -- that's what we need; not more money in the hands of greedy bastards.

[Per Kurowski]

One of the reasons many are now so upset is that now they want everyone to run and get it all done immediately, in a rush-rush-rush, with no time for detailing, though they themselves as supervisors of the financial sector have been irresponsibly inactive for years.

In my book, Voice and Noise, 2006 I quote the following phrase that in 2004, as an Executive Director of the World Bank, and as a member of the Audit Committee, I told their financial department:

“Phrases such as “absolute risk-free arbitrage income opportunities” should be banned in our Knowledge Bank. From what I have read and seen, I believe there is a clear possibility that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

This is not intended as an “I told you so” but to point out that if I, who had no direct responsibility or involvement in the supervision of the financial sector and was really not even involved with the sector had, in mid-2004, already gotten the message… why on earth did it take so much for the responsible to do something about it and what about their accountability?

Has anyone heard about a regulator-supervisor fired and fined?

[Zach]

I think there are a number of reasons:

1) State intervention in taking over AIG, along with the announcement of a "secret plan" by Bernanke & Paulson, worked to lance the delusions of the panic that was setting in, on Wednesday of two weeks ago. However, it worked so well that it created a delusion of its own: that there really wasn't a major problem with the economy. This delusion set in across the political spectrum, and was furthered by the media's usual depiction of the Dow as somehow an indicator of the health of the economy. When the Dow stopped falling, people went back to their daily lives.

2)Many people out there have little understanding, or wish to understand, how the world around them works, and how they fit into that. I wish that weren't true, but it simply is.

3) Some on the Right are having difficulty acknowledging how their economic philosophy was just completely demolished, in broad daylight for everyone to see.

4) Some of us, who have a fair degree of understanding of the situation and want to see a set of solutions, see the B-P "plan" as completely unworkable, and more of an attempt to paper over the problem temporarily out of political expediency. Besides, while some of us have friends in investment banking, and are not so small-minded that we would damn Wall Street out of spite, we do not trust the nexus of Wall Street and DC, and have a suspicion that the establishment is more interested in saving its power structure than saving the larger economy. After all, that nexus has waged open war on Main Street for decades now...

[Per Kurowski]

Krzystof Rybinski in a letter to the Financial Times, October 1, describes the bail-out plan in terms of Hank and Ben wanting to give money to John and Tim because, drunk, they broke four windows a table and burned a sofa. That letter really evidences how much more clarity is needed in order for everyone to know that the purpose of the plan is in fact to establish a present value for the windows, the table and the sofa, so that damage assessments can proceed.

Now, if you do want or cannot spell that out clearly, letter by letter, how can one avoid anyone believing Mr. Rybinski is right?

[Per Kurowski]

Given someone such extensive emergency authorities, without having formally decreed a state of emergency, is a major historic decision which implications needs perhaps to be pondered with much more calm.

[stocksprofessor Blogspot]

Average Joe has been sticked on the way up, the way down in the market, and now at the bottom.

In fact there is a solution to this "mortage crise" ( mortgages are just a scapegoat): allow people to buy back their mortgages from the market (even at higher price).They said they are 20 to 30 cents on the dollar, but I called my lender to say that I am ready to pay double that amount! They refused, and it is a bank in trouble!

Read the idea. solutions and the truths why mortage and credit crise explanation is a hoax to take your and my money moeny.

http://financialtraders.blogspot.com/2008/09/how-can-i-you-buy-back-my-your-mortgage.html

[David in NY]

I don't think enough blame has been given to Paulson's three-page wonder, making him emperor of $700 billion dollars, which might be entirely given away (buying things worth 0 or even 20 for much more than that) as far as us ordinary folk could tell. I think asking for a grant of absolute power was appallingly stupid.

[Ed in Pittsburgh]

There are many things going on here, it seems to me, but a key point is to remember what many (most?)economists - and politicians - have been telling "the people" for so long. More market competition will benefit everyone, more globalization of markets benefits everyone, the "losers" from all this are just a few, trust us to manage the process, etc. Meanwhile, we see stagnating incomes for so many, growing insecurity, growing inequality, and now chaos in the financial system. Why should "the people" trust the same "experts" now? The latter may be right this time, but their record gives anyone paying attention good reasons to be skeptical of these "messengers".

[ckstevenson]

So you posit that the general masses know how to fix the economy? The same people up to their eyeballs in debt? The one's who intentionally borrowed too much money to buy houses, or were duped into doing so?

No. Flat out no. The reason politicians voted no, is because the lay person viewed this as a bail out for the rich and that is "bad". The politicians voted to save their jobs, not based on what was right or wrong (it was a bad bill), but what would save their jobs in the election.

Now they all have an out, they were all against it before they "had" to vote for it in v2.

[car loan]

This is not intended as an “I told you so” but to point out that if I, who had no direct responsibility or involvement in the supervision of the financial sector and was really not even involved with the sector had, in mid-2004, already gotten the message… why on earth did it take so much for the responsible to do something about it and what about their accountability?

http://www.consumercarloan.com

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