This morning, the Treasury announced yet another massive new spending program to buy AAA consumer loan securities. This is probably less expensive than any of the other programs so far rolled out; consumers with long, sterling credit histories are the type of people who ferociously guard those histories. Even if the downturn pushes some of them to the wall--and I assume it will--the securities in general should pay off. If it's structured right, this will essentially be the most extensive carry trade play in history.
But of course, many of the reporters at the press conference pressed Hank Paulson to admit that the bailout wasn't working, to explain why he can't seem to get it right. The reason he can't get it right, of course, is that no one understands what's going on well enough to guarantee the results of their activity. Paulson looks like he's flailing because every time the facts change, he changes his mind. And the facts are changing very, very fast.
The lack of consensus as to a program is actually kind of stunning. Usually in an economic policy debate, the wonks settle on a couple of fairly fleshed out proposals. Oh, sometimes they agree on one (trade); sometimes the number swells to three or four (taxes). But there's a pretty solid menu of policy choices from which the politicians can choose before adultering it with their special (interest group) sauce.
But the only consensus at this point is so broad as to be completely useless. Banks should deleverage. They should lend more to people with sound credit. The government should try to spur aggregate demand. Puppies should bark, and kittens should go "meow".
Since September, I've been to a hell of a lot of panels, discussions, and interviews about the crisis. Almost all of them feature prominent calls for tougher regulation by certified Very Smart Economists. When pressed upon the details of this regulation, however, they tend to get rather vague. "We need a stronger regulator". Okay, and what exactly should he be empowered to do? "The regulators need to watch the banks more closely." Okay, yes, but what will they be watching for? "The regulators need much more power to keep the banks from taking risk." Yes, yes, thank you, Dr. Insight, and what specifically is the regulator going to do with this power? Further deponent sayeth not.
These are not journalists, mind you; these are PhD economists with a specialty in finance--the class of people whom we expect to regulate these banks. The further left they get, the more strident they are in calls for regulation. But they seem unable to come up with any actual, specific things that the regulators should do except . . . keep the banks from levering up to much and taking too much risk. How much, exactly, is too much? Why, enough that the banks start to fail, of course!
Similarly, there is broad agreement that the government should keep the good banks afloat and close the bad ones. How do we discover which are the bad ones and which are the good ones? What should be done about the various derivative asset classes that are in trouble? Um, well, we should take care of that problem, quick.
This is, in fact, the entirely appropriate response to a situation that has a the very least severely damaged most of the longstanding theories about this sort of crisis. Excessive certainty in the face of unknowns is politically attractive, but economically suicidal.
The Bush administration has long been criticized for sticking to its guns too long in Iraq, even when it became clear that what we were doing wasn't working. Paulson isn't making that mistake--and is instead being castigated for changing tactics to fit changing situations. Where did we get the idea that our regulators were supposed to be omniscient?
Never mind. I can't believe I asked that.