Remarkably Wrongheaded

[Update: I want to apologize if I hurt anyone's feelings with my use of the word "wrongheaded", or any of the other stuff below. I meant this to be a serious post, about the fact that some -- yes -- serious people in the blogosphere are focusing on the wrong topic (the stock market and an out-of-date, broadly worded letter) rather than the right one (the crisis in our credit markets). I hope anyone reading this post will read it in that spirit.]

Over at Volokh, there's a debate going on about the bailout. Eric Posner's Poof! is in general on the mark in its criticism of Ilya Somin and Casey Mulligan (note: I haven't had time to read Mulligan's post). Somin replies in disagreement.

The main point Posner makes is that a potential drop in global stock markets worth $2.5 trillion shows that turning down a $700 billion bailout (actually, the cost would be less, maybe much less than this) is a dumb move. Somin responds by noting that the stock market lost more in the crash of 1987. He also notes "A recent petition signed by over 120 prominent economists from across the political spectrum".

Neither of these defenses is serious. [Update: Please note that I am saying the defenses, of the position that the bailout should have been defeated, are unserious. I didn't mean and have no reason to suggest that Somin himself is an unserious person for making them.]

First, the proximate threat at the moment is to credit markets, not stock markets. And credit markets are, to be frank, in very deep shit at the moment. The stuff that's happening to the stock market is not the flood, but rather its runoff. For the moment, anyway, arguments over the stock market distract from the real issue. In fairness, Somin's original post is in large part a response to others claiming the stock market drop was definitive. But his post says next to, or maybe exactly, nothing about credit markets, debt-deflation, or anything else that is of first-order relevance at the moment. He's arguing over a sideshow. (And he's arguing over the wrong sideshow, at that: the S&P500 is a much better measure of the stock market than the Dow.)

Second, as to that letter signed by all those prominent economists (a number of whom were classmates or professors of mine, and all of whom I respect, given that I know them or their work). Here's the first line on the website for that letter:

(This letter was sent to Congress on Wed Sept 24 2008 regarding the Treasury plan as outlined on that date. It does not reflect all signatories views on subesquent plans or modifications of the bill)

The letter is now 5 days old. In the days since, the plan that the letter criticizes has been greatly modified. As anyone who has followed the legislation at issue and the history of the letter itself should know, and as the disclaimer I just quoted states, the critiques made in the letter concern the original Paulson plan, not yesterday's bill. It's either lazy or dishonest (my money's on lazy in this case) to continue citing this letter as a basis for opposing today's bill. [Update: some readers seem to think that I am implicitly suggesting that Somin is dishonest because I note that one must either be lazy or dishonest to cite this letter without the since-added disclaimer cited above. I'm sorry that readers drew that inference, which I didn't intend: the parenthetical remark was meant to specifically make clear that I meant not to imply dishonesty. Moreover, in an update responding (unpersuasively, in my view) to this post, Somin has now added the disclaimer.]

I don't know how all the signatories would respond if asked whether the bill defeated today would gain their support, but I'm sure that at least some would say yes.

I'll have more to say, but the fact is that we find ourselves on the edge of a major precipice. It's too serious a time to be distracted by the arguments Somin is making.