Early on in this crisis, Jim Manzi compared the situation in the credit markets to someone getting hit by a car. A lot of people doubted the direness of that analogy (local banks were still lending, the market went up the day after the Paulson plan was defeated on the first House vote, etc. etc.). Now, there can’t be any doubt about it–we are in a genuine crisis.
The next question is about the Paulson plan. Has the continued deterioration of the credit markets and the fall of the Dow shown it was unnecessary or proven that it isn’t working? No, and no.
It seems obvious now that we needed some sort of massive effort to try to prop up the banks and loosen the credit markets. (Remember: There’s always the possibility that things would have been much worse without whatever psychological benefit–if any–the passage of Paulson brought to the markets.) Perhaps the Paulson plan wasn’t exactly the right prescription. But the virtue of its open-endedness is that it allows Paulson the flexibility to adjust as warranted–witness the shift in emphasis to direct equity infusion.
As for whether it’s working or not, nothing’s been done yet so it’s impossible to judge. Since this is a serious crisis, it’s not going to end in a day or two. It’s going to be a drawn-out effort. Saying the plan isn’t working right now strikes me as similar to liberals arguing immediately after Bush announced the surge that it wasn’t working even though additional troops hadn’t arrived in Iraq yet.
All that said, all of this is going to be second-guessed and argued about for a long time. It might have been that the crucial mistake wasn’t bailing out Lehman too. Or perhaps the Paulson plan should have been offered earlier. Gerard Baker suggested this the other day: “The passage of the Paulson plan by the House of Representatives last Friday has shown, at best, the truth of the proposition that it was always a necessary but not sufficient condition for financial recovery. At worst, it is possible, as another senior financial official put it to me at the weekend, that it simply came too late.” Let’s hope not.