By Arnold Kling
I will update this post as new items merit attention. First, my latest essay opens,
I am concerned that the bailout might be the cause of the problem that it purports to solve.
I am re-using Karl Kraus’ famous quip about psychoanalysis. Read the whole thing, and you can decide whether what I am offering is analysis or just psycho.
What responsible, honorable people do is apologize for their mistakes, promise that it won’t happen again and vow that they’ll make it up to us once the crisis has passed. But in the past year, we’ve not heard any of that from the titans of Wall Street.
Pearlstein never raises the issue of an apology from anyone in Congress. They might be considered automatically exempt from standards for responsible, honorable people.
Tom Brokaw offers exactly the right tone on the bailout.
The Treasury plan does create a large and willing buyer, an element missing in the markets until now. But at what price? If Treasury pays close to par, (as Fed Chairman Ben Bernanke seemed to suggest at the Senate hearing yesterday), it is paying far too much. If it pays current prices, no one will sell due to the impact on their capital. If it pulls a price out of a hat, it will be acting arbitrarily. The proposal needs to articulate the price-setting process.
Whether this is a fatal flaw or just a minor detail is what I talked about here.
The authors do not offer a clear alternative. I do, in the essay linked to at the beginning of this post. Yes, it’s another plug for my idea of capital forbearance.
Ed Glaeser says house prices are mean reverting. He also writes,
If a housing market has increased by 100 percent over the last five years, then mean reversion implies expected price declines that can easily wipe out that 20 percent cushion.
Yes, but if every lender requires a 20 percent down payment, you are less likely to get such a rapid run-up of prices. Thanks to reader John Alcorn for the pointer.
Tyler Cowen looks at the Dodd plan.
It is easy to say that the Paulson plan is worse. (Oddly I think the Paulson plan makes most sense in Paul Krugman’s multiple equilibria model for asset values.) But you shouldn’t think that the Dodd plan is very good. Most of the Dodd plan boosterism I’ve seen doesn’t look very closely at how it actually going to work. There’s lots of talk about justice and the taxpayers getting upside and then a reference to the RFC from the New Deal.
Kaimpono D. Wegner suggests that instead of giving the money to banks, the bailout should go to homeowners. He points out that if the ultimate goal is to help households, this is a less indirect route than giving the money to banks.
But I have the most indirect route of all. Instead of having households give the money to government, and the government gives the money back to households, why doesn’t every household write a check to itself for $5000? That would inject about $700 billion into the economy. Am I brilliant or what?