The Political Economy of the Bailout
By Arnold Kling
Tyler keeps wondering whether the bailout (or “bank recapitalization”) is going to work. He is asking the wrong questions.
Whether the economy needs a “plan,” or whether the plan will help the markets, is beside the point. The plan serves to consolidate power. Four weeks ago, the Fed and the Treasury had far more power than anyone can intelligently use. Still, they came to Congress requesting more power. Then, when the bill was passed, Paulson took even more power than what it sounded like the legislation was giving.
Now, there are rumors that the Democrats plan to re-appoint Paulson as Treasury Secretary. This American Mussolini has captivated Washington by demonstrating the exercise of raw power.
What I call the “suits vs. geeks divide” is the discrepancy between knowledge and power. Knowledge today is increasingly dispersed. Power was already too concentrated in the private sector, with CEO’s not understanding their own businesses.
But the knowledge-power discrepancy in the private sector is nothing compared to what exists in the public sector. What do Congressmen understand about the budgets and laws that they are voting on? What do the regulators understand about the consequences of their rulings?
We got into this crisis because power was overly concentrated relative to knowledge. What has been going on for the past several months is more consolidation of power. This is bound to make things worse. Just as Nixon’s bureaucrats did not have the knowledge to go along with the power they took when they instituted wage and price controls, the Fed and the Treasury cannot possibly have knowledge that is proportional to the power they currently exercise in financial markets.
Note: I will be on travel from now through the weekend. My writing will be greatly reduced during that time.