Economic Assumptions
March 23, 2009



I’m really curious to see what happens with today’s new plan to fix the banks. Among people to whom I listen about the economy, opinions are sharply divided; here’s a strong argument in favor from Brad DeLong and a strong argument against from Paul Krugman. I don’t know enough to have a defensible opinion, although my instincts are with Krugman and against the banksters, so I don’t have much confidence in today’s plan.

Obviously for the sake of alleviating economic suffering I hope it works out, but I also think this is an intellectually critical moment, much like the Iraq war debate. Krugman and DeLong (and Calculated Risk, and Yves Smith and others) have all staked out clear positions on the issue based on their different assumptions about reality. The success or failure of the plan will serve as some sort of test of these assumptions, and will therefore tell us something about reality. It’s not as rigorous (or even controlled) as a scientific experiment, but clear debates like this are the closest approximation to science that real life offers.

For example, in 2003 I supported the Iraq war based on the assumption that the Bush Administration possessed actionable WMD intelligence they weren’t sharing with the public. This was partially because they were saying they possessed such intelligence, but mostly because I couldn’t imagine a case for offensive war without it. When Saddam proved not to have a nuclear or biological arsenal, my assumption of the Bush Administration’s good faith and basic competence was falsified, and I started paying attention to this whole “politics” thing.

So for future reference I think it would be a good idea to state clearly the assumptions that I think will be tested by implementation of Geithner’s new bank plan. Foremost is the assumption that mortgage-based assets are currently undervalued, and so if the government buys them from troubled banks and holds on for a while, they’ll regain their value and we taxpayers will get our money back. In other words, “there are no bad assets. Only misunderstood assets.” What a progressive, tolerant attitude!

Everyone seems to agree that if this is correct the banks will be fixed and if this is wrong the banks will not be fixed, so it should be pretty clear in a few weeks or months what these assets are worth. Or, more accurately, it will be clear whether “it’s the bad state of the economy that’s making them so worthless and [whether] if you solve the bank capitalization problem the asset values will rise.” Either way, this is a straightforward, testable assumption.

Adding a level of abstraction, we can also explore how people decide what to believe about these assets. In 2002, nobody knew for sure whether Saddam had a huge secret WMD program, and there was conflicting evidence (e..g. Colin Powell and the CIA vs. Hans Blix and the UN), so everyone with strong opinions about it formed their opinions based on their own models of the world and, especially on which information sources they trusted. People who got it right tended to distrust the mainstream media, the military-industrial complex, and especially the Republican Party and the Bush Administration.

In this case, my (entirely subjective, open to debate) understanding is that people who oppose the Geithner plan tend to distrust pretty much the entire finance sector and to discount the value of expertise in this sector. People who support the Geithner plan don’t necessarily believe in the banksters, but they seem more cautious and deliberative, uncomfortable with the current populism in Congress and the breathtaking scale required by the alternatives such as temporarily nationalizing American banks. (As usual for this blog, I’m ignoring the crank conservatives who argue instead for spending freezes and deregulation and just letting the banks fail.)

So, depending on how the banks fare in the next few months, we can test a few assumptions. I’m slightly interested in how the value of mortgage-based assets changes in the future, but mostly as a curiosity and as an indicator of the direction of the housing market over the next five to ten years. I am very curious about which group of economists will be proven right about the plan, however, since I think it will tell a fair amount about which worldview (i.e. the shrill one or the stately one) makes better predictions.


Dithering While the Economy Burns
March 8, 2009


The economy is in really bad shape right now, and everyone’s aware of this and concerned by it, so I’m somewhat surprised by the paucity of ideas I’ve heard about how to fix things. From what I’ve read, however, Paul Krugman seems to be right – there is a straightforward path forward (nationalization + more infrastructure stimulus), but Tim Geithner seems paralyzed by indecision or by his prejudices, so no action is taken. And Atrios is correct to remind us: the buck stops with Obama.

The Credit Crisis
February 20, 2009

If you’re curious about the economic situation at all, alarmed by recent talk of nationalizing banks, and/or don’t know what a credit default swap is, then I definitely suggest taking eleven minutes to watch these videos below the fold. And note that they manage to explain the whole thing without ever mentioning Fannie Mae or Freddie Mac!


Poverty is a Disease
December 23, 2008

When I was growing up, I learned that in America, there are no social classes: if you are smart and work hard then you will be successful, no matter who your parents are. I doubt many Americans believe this anymore, especially now that the economy is on everyone’s mind. But this idea does seem to persist in modern conservative punditry, and I (as far as I understand it) classical microeconomics also doesn’t adequately factor in the nonlinear role of class (by nonlinear I mean someone who makes $10000/year is more than 10 times worse off than someone who makes $100000/year).

So here is some research that should kill this antiquated idea. First, a summary by Paul Krugman from back in February. Then, two updates from the past month. In summary: being born into poverty is like being born with a developmental disorder. Your chances of escaping poverty are not good. This country is not a fair place.