[IWE] Galbraith's OpEd on what should be done about the Bailout.

Ben Tilly iwe@warhead.org.uk
Thu, 25 Sep 2008 21:52:13 -0700

On Thu, Sep 25, 2008 at 4:26 PM, D. Scott Katzer <dskatzer@os2bbs.com> wrote:
> Ben Tilly wrote:
> Thanks for your comments.  I think the public and the skeptics would feel
> much better about the need for something like this if:
> 1) Paulson and Bernanke had talked this way when the plan was presented.
>  (Perhaps they did in their hours of testimony and the press failed us by
> not covering it properly.  I dunno.)

My understanding is that they did.  Unfortunately, being experts, it
is hard for Paulson and Bernanke to discuss this without slipping into
technical jargon, and without going into key technical points that
most people won't understand.

> 2) P&B had talked about why they chose the number they did, why it was
> structured this way, etc.  Some indication that they had learned from
> Japan's and Sweden's experiences, for example.  As it is, people feel worse
> about it by the day when they read things like:
> http://andrewsullivan.theatlantic.com/the_daily_dish/2008/09/dept-of-reassur.html

During testimony they were asked, "Tell me as an economist, will $700
billion suffice?"  Paulson's answer was basically, "The problem is
that you are asking me to answer as an economist.  But it is a problem
of psychology."

> "[The $700B number] is not based on any particular data point," a Treasury
> spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really
> large number."
> :-/

As a friend of mine who knows Wall St loads better than I ever will commented:

: I don't like the idea, but perhaps in a world where so few are properly
: educated in the cabal of their mandatory participation religion, it
: might be best if they don't hear quite so much about where their money
: comes from....

Wealth is created by psychology.  We are wealthy if everyone agrees
that we are wealthy.  If you don't believe this, then explain the
difference between a boom and a recession.  You have the same people,
basically the same infrastructure, and pretty much the same products.
Where is the difference if not in the psychology?

Treasury is being honest.  They needed to name a figure large enough
to shock people into considering the world differently.  How large is
large enough?  They don't know.  Doing a $85 billion bailout of AIG
wasn't big enough, so it has to be a much larger figure than that.

> 3) You're probably right that any explanation will go over the head of most
> people (and even most economists).  But that doesn't excuse the requirement
> that the explanations be given.  Instead, we got Section 8 in the Treasury
> proposal, etc., etc.  They were shooting themselves in the foot (and
> potentially making the situation worse).

Explanations have been given.  But the explanations were too
technical.  And then they got filtered through media reporting, with
reporters who didn't understand.  I personally think they did too much
explaining of esoteric details (eg how securitization works) and not
enough connecting the dots (how the failure of those securities leads
to people losing their jobs).

Taking advantage of the opportunity and panic to seize power is,
unfortunately, classic Bush.  However he came from a family that has
been profiting from war and panic for generations.  (Literally, the
Bush family had large windfalls in every major US war from the Civil
War on.)

> As it is, we may have the worst combination of arguments being presented
> when, in fact, something must be done quickly to prevent the sclerosis that
> we all fear.  My concern is that we'll end up spending a huge amount of
> money to buy some of these bad loans and so forth, but it won't make a dent
> in the problems of foreclosures or credit card debt or ....

Granted, the bailout might not be enough.  I also think it has the
wrong structure.  It is a classic Wall St solution, and only a Wall St
insider would think of tackling the problem this way.  However its
effectiveness is based mostly on how effective Wall St thinks it would
be, and Wall St thinks it would be effective.

> We'll see, I guess.
> Thanks again for your long comments.  I've missed your essays.  :-)

Heh.  I've been busy on other things.  Such as my growing son Sam, and
6 month old daughter Claire.