Wednesday, October 01, 2008

166 Economists: No to Bailout

A week ago, one hundred sixty six economists*, including three Nobel laureates and many at distinguished institutions, sent a letter to Congress insisting that Congress not bail out troubled financial institutions. With few exceptions, the MSM have more or less ignored it. (Economists! What would they know about this?)

They gave three reasons to sink the plan. It's hard to be sure whether the Senate version has all three features objected to, because the Senate is keeping their plan a secret until they are ready to spring it on us. (So much for transparency!) But I suspect strongly that it does have all three. Here are their objections:
1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come
Note, especially, the part about appropriate hearings. The only hearings I have heard about that have happened so far consisted of Paulson and Bernanke telling the Senate Banking Committee why their bailout plan is a great idea. These 166 people are the sorts voices that have not been heard in this process. Congress is acting as if this were the first one hundred days of the New Deal, when their predecessors enacted unprecedented measures to deal with a national emergency that had already dragged on for three years. It is nothing of the sort. They are also acting as if a deep economic problem is merely a political one, like the size of the Pentagon's budget, to be solved entirely by politicians. It is not.

I urge you to email your Senators immediately and beg them to vote no and hold hearings, public hearings on this issue, which will affect your children and grandchildren in potentially very serious ways. [Added later: For the obvious reasons, I am now changing this to a plea that you write to your Representative. Come November, I hope you will use this handy list of the Senators and how they voted. I am very happy to report that one of "my" Senators, maverick Democrat Russ Feingold, voted no. ]
* Ann in the comments section points out that the number of signers has now risen to around 230.
Added later: It's Wednesday evening, waiting for the Senate vote, and I see that the Senate version of the bailout bill contains an extra one hundred billion dollars worth of "Christmas tree" items -- including items having to do with wool production, wind power, and mental health. These are all "sweeteners," added to make the package more attractive to members of Congress. In other words, in order to entice Congress to take $700,000,000,000 from us to reward people for making bad decisions, they are being offered, as an incentive, an opportunity to take another $100,000,000,000 from us to support their pet causes or give to their friends.


pappy d said...

Please pardon me if this is a dumb question. I'm a hack cartoonist who just surfed in from Uncle Eddie's blog.

Why, in a free market, would you expect politicians not be commoditised like anything else?

Lester Hunt said...

... so I guess you'd consider a slave market and murder incorporated to be free market phenomena? They aren't so free for the slave and the people who are murdered. These politicians are trading acts of theft.

Anonymous said...

Here's the url for the 451 page bill

The real problem is that the money spent will only provide a temporary fix.

Anonymous said...

I think the number of economists who signed is up to 230 now, and they range across the spectrum in terms of who they support for president and how serious they believe the current situation is. I have almost zero confidence in the political class - they are almost all trained as lawyers, and they show immense collective ignorance about basic economics, as Lester has already pointed out. So much of what they are doing at the moment is pure economic theater (similar to security theater in the airports) and will likely be harmful, e.g., enforcing mark-to-market accounting and short selling bans. But the politicians will prevail on this because they've succeeded in riding the panic wave to suit their agendas. The maddening thing about society is that you can't conduct controlled empirical experiments. Many people take their economic prosperity as a given, like cosmic background radiation, but when the market has a downturn, they are like deer in the headlights. We'll dig out of this, but the wrong people and the wrong policies will get the credit, and we'll go through more excessive economic pain and regulation than needed to be. Sorry for the rant here, I'm just sick of reading these mindless political mantras by these self-serving Democrats and Republicans alike.

pappy d said...

Maybe you underestimate my ignorance, but yes I do. I'm not competent to argue economics, but both the slave trade & murder-for-hire seem like economic activity to me. Assassination usually involves a profit motive. In the slave trade nowadays, a farmer typically sells his surplus children into slavery to settle debts & assure that they'll be fed. As capital equipment, they're often better treated than workers for hire. Bribery is usually undertaken to protect free enterprise against the tyranny of the majority.

I know it's hard to tell in the blogosphere when someone is being facetious, but I swear, I'm not. My personal objection to these activities is purely moral.

Lester Hunt said...

pappy d,

I apologize. I thought you were asking a cute question, so I gave a cute answer. Here is an attempt at a serious one.

This is a semantic issue, but like many others it has effects on issues of great substance. I would distinguish between "markets" and "free markets." Both are economic terms but the latter is also a morally loaded one (and there's nothing wrong with that!).

A market is people carrying out trades. A free market is one in which people are trading property rights that (here comes the moral part) they actually do possess, in the context of a legal framework that prevents them from violating the property rights of others (and does nothing else). For these purposes, to simplify matters, I include self-ownership rights, like your right to decide what to do with your hands, voice, brain, etc., to among property rights.

A slave market is of course a market. But it is not a free market, because it massively violates the self-ownership rights of the slaves -- slave traders are exchanging property "rights" that they do not actually possess. The same is true of a person who sells stolen goods.

To get back to our original example. Some legislative logrolling -- I'll support your subsidy for wool producers if you support my bailout for banks -- are like those other, non-free, markets. They are like trading stolen goods for stolen money.

I know this makes "free market" sound like an idea that is terribly complicated, but that is true of almost any theoretically useful definition -- try explaining exactly what "tree" or "leaf" means and you'll see what I mean.

Lester Hunt said...


Your comment is excellent as always. I'll add a note about the number who have signed the letter.

pappy d said...

Thanks, professor!

The semantics are certainly complicated.

Anonymous said...

Thanks, Lester! I hope your blog enjoys a wide readership - it's one of the best out there.