Things you can't say
Robert McDonald of the Kellogg School at Northwestern (full disclosure: I once worked there) has an interesting take on the bailout:
The problem with commenting on the financial rescue plan is that Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson Jr. have not told us all that they know about the financial crisis. Specifically, we don’t know about the financial health of banks individually or in the aggregate. In this entry I will offer a guess: There is widespread bank insolvency and the point of the rescue plan is to use asset purchases to save banks that are good and, just as important, to facilitate closing banks that are bad. If this is right, the rescue plan is a sensible response to the crisis. In effect the plan has a secret component: widespread and controlled bank closings.
This may be the best argument I’ve yet heard for the bailout. I’m still skeptical, though. [EDITOR’S NOTE: Reader Matt Frost alerts me that I was reading lazily and stupidly last night, so the rest of this post reflects a correction.] While a pledge of $50 billion in insurance seems sufficient to have stopped a roughly $250 billion run on money market funds (which dropped from a record of $3.535 trillion on September 9 to $3.288 trillion just ten days later, according to CNN), there’s no golden formula for how much insurance or backing or distressed asset purchasing you have to do in order to restore investor confidence. How can we know $700 billion will accomplish the same in the broader market?
We should at least consider it from the other direction: the larger the proposed government intervention, the more shaken investors will get, because they’ll think things must really be bad. Insurance and a larger bailout are different things, and though I’ve found no way of quantifying this just yet, I suspect this phenomenon helps in part to explain why the market continues to tumble after the bailout package went through. After all, $700 billion is an astonishingly large sum of money.
If the President of the United States, the Secretary of the Treasury and the Speaker of the House — all of whom now enjoy public approval ratings on par with herpes — all spend several days yelling THE BUILDING IS ON FIRE THE BUILDING IS ON FIRE JUMP OUT THE WINDOWS THE BUILDING IS ON FIRE, it doesn’t really matter if they add “help is on the way” afterwards, because oddly enough, people have a tendency to fixate on the earlier part of the sentence, you know, about THE BUILDING IS ON FIRE THE BUILDING IS ON FIRE RUN FOR YOUR LIVES SAVE YOURSELVES TRAMPLE OLD WOMEN LOOT STORES GO RAIDERS.