Sunday, October 5, 2008


From the street vendor to the cab driver to the President of the United States, we are all economists and financial experts now. Everybody (including my favorite bloggers) knows that the bailout package is good, bad, will work, won't work, etc., etc. The Congress should have done x, or y or z. Some cite certain economists for support. Most don't bother. What is uniform is their lack of doubt about their particular take on the problem if, of course, they believe that there is indeed a "problem".

The truth is much simpler and a lot more scary: NOBODY KNOWS WHAT WILL WORK.

We are in uncharted territories. Although, as The Economist (Oct. 4-10, 2008) and other publications have noted, we can look back at other economic crises (S&Ls in the 1980s, Sweden & Japan in the 1990s, and, of course, The Great Depression), there are two problems for people trying to draw lessons from them. First, they are all different in very important ways. Second, even economists disagree about their causes and whether or not the measures taken were necessary or the best available. (Some now wonder if letting Lehman fail did much more harm than good.)

Much of the difference in the opinions of various experts today can, I suspect, be traced to their convictions about the primacy of The Free Market. The ones who are sure that FDR caused the Depression by too much government interference (that the market would have worked itself back to health much more quickly if the government had just let people starve) pretty much oppose government interference today. And vice versa.

Is there a problem? Well, I think one would have to be living in an alternate universe not to recognize that we are in or close to a worldwide financial panic. That it may not be rational is irrelevant. Panics are, by definition, irrational. It is hard to imagine (though not impossible) that any proposed fix could be worse than doing nothing. And, as far as I can tell, the bill that passed the Congress gives the Treasury Secretary and the Fed a variety of tools for dealing with it. We can, at this point, only hope that they be pragmatic (is it working?) rather than ideological in their choices.

Experts may have caused this crisis, but that doesn't mean that amateurs and know-nothings (people who couldn't explain the difference between a stock and a bond let alone what a credit default swap is*) - including me - know enough to fix it.

I think a little humility would be appropriate.

*Ira Glass's This American Life once again comes to the rescue. Another Frightening Story on the Economy

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