The Corner

Re: Bailout Passes — Stocks Tumble


Glad to see some journalists are responsible, then. By the way, if anyone wants an excellent daily video explanation of how and why the markets are moving, my old friend John Authers of the FT provides just such a service at The Short View. If John’s half as good at analyzing the market as he was at team quizzes, he’s one of the best.

You’re right about the natural experiment, but I don’t think that experiment showed what you think it showed. For a start, your inclusion of the Great Depression in your analysis of bear markets seems to ignore the fact that it was government policy that made it much longer here than anywhere else. So that should be excluded from your data as an outlier. Moreover, there are all sorts of things we can do — the “no regrets” approach I outlined earlier — that should help stop the contagion and actually isolate the disease so that this doesn’t turn into the disaster you suggest. We can do that without sending $700 billion worth of taxpayers’ money to Wall Street. 

Now, there may be a case for further action after those steps are taken, but we need to identify the problem a little better first. Meanwhile, over at Naked Capitalism there’s a pretty persuasive case being advanced that the bailout will decrease the amount of money available for commercial lending:

When Paulson dumps out his 700 billion in treasuries it’s going to be at the short end. That will drive up rates for short-term treasuries. This will obviously draw even *more* deposits into the treasury MMs. That means even less in the commercial MMs and thus less working credit, the eventual commercial MM product. Hence Paulson’s billions remove working capital by competing for the deposits that could get used to make working capital loans. That 700 billion is going to go to fairly long-term mortgage securities. So Paulson’s billions divert credit from working capital to long-term mortgages – from where it’s most needed to where it’s most wasted.

Even if the giveaway adequately props up the banks, which I doubt, they still can’t make working capital loans, because the raw material they used (commercial MM deposits) will be desperately short.

I think it’s very telling that in two days of hearings and two weeks of discussion we have yet to see *any* detailed mechanism for how Paulson’s plan will increase the supply of, say, inventory loans. It’s not that every economist in the world is an idiot, it’s just not going to help. I think people have fallen into the fallacy that if it costs a lot it must be valuable. Paulson’s plan falls into the category of very expensive way to hurt ourselves.

Meanwhile, over at Breaking Views (subscriber only, I’m afraid), Martin Hutchinson suggests that the $700 billion will crowd out others more deserving of funding, thereby deepening the slowdown and almost certainly extending it.

So, depression or government-mandated greater depression. That seems to be the result of the natural experiment. Unless we do the “no regrets” option, yet that bizarrely appears to be the only one not on the table.


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