Saturday, September 20, 2008

Degrees of Freedom

I am reluctant to weigh in on proposed solutions to the financial crisis, because Ben Bernanke and Henry Paulson are a lot smarter than I and have a lot more information than I. Based on publicly available information, I thought Fannie and Freddie would be OK (and in the end, I think there is still a chance that the conservatorship will actually benefit taxpayers), but it is now clear that public information was not sufficient for making a judgment.

But while Bernanke/Paulson have more information than the rest of us, they have no foundation for calibrating a model to inform them how to move forward. We are completely outside the support of the data. As Charles Manksi describes it so simply and eloquently, because we are in a world of Xs we haven't seen before, we cannot possibly know how to relate those Xs to Ys. And so at the end of the day even our smartest policy makers must rely heavily on judgment. I am not reasurred when I remember that Isaac Newton lost a bunch of money in the South Sea Bubble .

I do think I support the RTC type plan that Paulson is proposing. My worry with it, however, is political more than financial. If we get the wrong sort of people (say those who went to grade school with the Vice-president, or those who were until recently running the interior department) running it in the future, it could produce cronyism and kleptocracy unlike anything we could have before imagined.


Anonymous said...

All these rich people got richer and will continue to get richer at the expense of taxpayers, and middle and low classes. All this will do is cover up the rich people's @##. And I say if you're not sure what you're doing, don't do anything and let the market adjust itself.

Anonymous said...

At the risk of trying to be funny when this is all really not very funny -- I've been calling it a "verklemptocracy." A "ver-kleptocracy" better?

Anonymous: when you let markets adjust themselves, they do not. They are monopolized and manipulated by those that pump out the free market agitprop. If we all agree that we really do need to regulate them, tightly, then we need to vet and audit the regulators and enforcers. IMVHO.

I think all of this is showing us that the system, not just the people, must change.

Good, smart people please have at it.

Anonymous said...

We need to learn from this mistake. We can't just treat it as a unique situation.