Wednesday, May 20, 2009

I had a complaint that I think I should address

I subscribe to the view that if one person is saying it, many others are thinking it, so I will share my response.

I received an email recently that questioned why no one is making a bigger issue of the fact that much of the money paid in the so-called Wall Street Bailouts were just to make other bankers better off. The email also criticized my use of non academic publications (NPR and 60 Minutes in particular).

My response (only slightly edited):

"point taken...

I do not necessarily agree with the bailouts (and strongly disagree with them on philosophical grounds), but I can understand why they are being paid.

Are they worse than the alternative? I honestly do not know. While I still think I would let some banks fail and others suffer, this would come with harsh economic consequences of job losses and crushed dreams for millions.

The current strategy may come with similarly harsh consequences (setting a bad precedent, inflation, over regulation as a knee jerk reaction are three that come to mind instantly) as well, but these consequences are not assured. Thus, at least from that perspective (trading a sure bad for a possible bad) I confess I would be tempted to do the bailouts.

Would I? I am not sure. I would like to think I would not since it sets such a bad precedent. But if push came to shove, I might very well take Bernanke's path.

Why do I say that? Because I have in the past given extra credit assignments, graded on curves, and done similar things in the classroom that are not totally unlike a bailout.

I am glad you disagree and it makes me think that much more about my positions.

That said, I think the 60 Minutes piece and the NPR piece have their merits. Are they "hard hitting"? No. But do they bring information that we have not been exposed to in other ways? Yes. Therefore, I stand by their inclusion from time to time. "

So while I am sorry for not being strongly one side on this one, it is a tough tough situation, and after many many hours of thought over these last nine plus months (say from Lehman on), I still am not convinced one side is totally right or totally wrong.


Anonymous said...

Please keep posting the non-academic material. I get the SSRN papers myself, anyway, but find the more popular items great for sharing with students, and sometimes for understanding how things are seen in the States. (I'm UK-based.)

Kim Snider said...

Jim- So glad you posted this. It is something many of us struggle with. As you know, I am a financial advisor focused on teaching my clients to manage their own investments. Over the last five months, I have seen clients determined to make really bad investment decisions based on their views of how the financial crisis is being handled. What makes me crazy is I know those views are often not arrived at after careful evaluation of both sides of the argument, but rather just repeating the views of the (insert either left or right) wing talk show host they listen to.

Let me just say that I am all about free markets, in theory. But in the real world, we have to face up to the fact that, as you say, the consequences of allowing these firms to fail, has to be a consideration. It is one thing to talk about it in a lecture hall, another thing to actually pull the trigger.

Here is what I tell my clients: 1) Nothing is a foregone conclusion and you shouldn't make investment decisions as if it is. Hyper-inflation, for example, is not a foregone conclusion. Super smart people can (and do) make equally cogent arguments for why we won't experience the inflation everyone says is inevitable. 2) No one knows the right answer about how to fix the system. You may think you do, but really, no one knows. Every situation is unique and the magnitude of this one is staggering. It is really all a bit of an economic lab experiment, isn't it?

Nobel prize winners argue about the right answer and they don't agree. How can the man on the street really believe he knows the right answer? Even if you adamantly disagree with current policy, isn't it reasonable to believe there may be more than one way to skin a cat?

Some other interesting questions come to mind:

Is the availability of so much information a good thing or a bad thing? Does it create too much Monday morning quarter-backing? Does it cause people to better or worse economic decisions for themselves and their families?

Sorry for the rambling comment. Would love to hear your thoughts. Keep up the good work.