Stealthy Impotence

The U.S. Treasury has not yet actually given funds to banks pursuant to its bailout plan. Those funds are intended to "go out the door" between this week and the end of the year. The crisis began a least a year ago, and became obvious to the world in mid-September.

I have repeatedly explained that those funds are impotent, or perhaps even a bit counterproductive.

I am worried that my tone seems critical. After all, I am saying that the government's timing is bad (recall Milton Friedman's essay on counter-cyclical policy -- he thought it could be potent but was doomed to be ill-timed) and its actions impotent.

That's the wrong impression. In the midst of a panic, there is value in pretending to "do something" without actually doing anything that would affect market outcomes. Whether by accident or by intention, the U.S. Treasury and the Bush administration have impressively come close to doing exactly that. There was great fanfare about the bailout during the first week of October. Every time you saw Paulson, Bush (or Bernanke for that matter), they had very serious looks on their faces, clearly conveying the message that they were regarded the economy and their fixes with utmost seriousness.

Most economists felt better that the Treasury had big plans and had even tweaked those plans to better reflect the academics' advice. Probably the public felt better too. I am absolutely certain that, while sometimes intangible, feeling better is an important commodity. For example, brand names have tremendous value -- what are those names doing if they are not making people feel better? Although the production of good feeling would ideally be left to private enterprises, I admit that the Treasury created real value by the fanfare alone.

The Treasury has dragged their feet a month now. Hopefully they can stall further, without giving back too much of the good feeling they created.

Apparently, I am alone in entertaining the idea that the best solutions to tough problems come from the marketplace. I have repeatedly offered detailed explanations how those solutions might work in this situation. But even I obtain comfort from the fact that, when the Treasury's time for stalling has run out, it will implement an impotent solution -- that is, a plan that has minimum interference with the market's functioning (there is some interference with market, but -- aside from literally doing nothing -- the interference is less than the alternatives). So the Treasury approximates the benefits of doing nothing, without the cost (that is, the opportunity cost of making people feel like "something is being done").

Not only does the Treasury's plan have the genius of letting the market operate with minimum interference, but it allows Paulson, Bush, and Bernanke to be ultimately regarded as heroes. A year from now, when the "severe recession" has failed to materialize, they can claim full credit for avoiding it. Furthermore, they'll have a legion of economists who remember that they (the economists) supported the bailout (and who will have forgotten that they predicted severe recession) and will have to give some credit to the public servants who implemented it. Moreover, the economists themselves are protected against risk, because in the unlikely case that the economy is depressed, they can offload blame on the public servants for implementing an impotent policy, or failing to implement an allegedly potent one in a timely fashion.