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Monday, September 29, 2008

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the fact that some -- yes -- serious people in the blogosphere are focusing on the wrong topic (the stock market and an out-of-date, broadly worded letter) rather than the right one (the crisis in our credit markets).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.

Posted by Jonah Gelbach on September 29, 2008 at 11:42 PM in Current Affairs | Permalink


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» Does the Stock Market Fall Prove that the Bailout Would have Been Worth it? - Round II: from The Volokh Conspiracy
Co-blogger Eric Posner argues that today's decline in the stock market proves that the bailout would have been worth the cost: [Read More]

Tracked on Sep 30, 2008 2:02:50 AM


It is astounding that every comment is about Jonah's tone and whether the post accurately portrayed or "responded to" another post. No one bothered about the substance. If Jonah told Orin to grab his fucking dog and pictures because he saw smoke pouring out of Orin's house, I suspect Orin would want to have a discussion about why Jonah felt the need to use the word "fucking." Instead, he should explain to him why it is that his house often has smoke but no fire.

Posted by: Craig | Oct 1, 2008 12:14:51 AM


I read Ilya's post, I'm wondering if you have. Jonah made a comment about the substance of his post: its relevance, significance, importance, etc. A failure to see that is not a little disturbing. Please have the last word(s) as mine are to no avail.

Posted by: Patrick S. O'Donnell | Sep 30, 2008 3:25:43 PM

Patrick, Ilya's against many things, but his post was about the evidentiary value of the stock market drop. Anything other than a claim related to the evidentiary value of the stock market drop is not a response to the substance of his post.

Posted by: Bruce Boyden | Sep 30, 2008 2:39:13 PM


Please...no one is claiming Somin's post is about the "source" of the difficulties as such, but it was clearly generated in the context, backdrop, significance, what have you, of the bailout (and thus, by implication, the financial mess that led to the perception of need for same). He's clearly against it, and thus his point about the relevance of the stock market in this regard, which would lack interest (rhetorical punch and persuasion) were it not tied to the current financial crisis and the prospects of a bailout. My quotes above make clear the obvious connection that he discusses at several points and in response to others. He's the one discussing this in light of the bailout proposal, financial mess, etc.

Again, Jonah's point is that the focus of attention on the stock market as such serves to detract from, ignore, pass over, fail to mention, neglect, and so on, the credit markets, however and in whatever manner the two are linked to each other. The rhetoric in this case does not serve the interests of what you term logical consistency. Jonah (and I) get the point about stock market signals which, again, are beside the more important point about credit markets which is not being addressed and Jonah believes should be. Again: the discussion of the stock market serves to pass by what Jonah believes should be the main topic of discussion, given the concern of all parties with the financial mess and the bailout proposal(s).

I now have a bit more sympathy for the errors my students make when reading and interpreting far more difficult passages from the world's bounty of religious scriptures.

Posted by: Patrick S. O'Donnell | Sep 30, 2008 1:58:48 PM

Thanks for responding. As Bruce notes, I think we're all talking past each other. I read Ilya's post as a response to claims that the fall in stocks shows that the bailout was necessary (against the background of previous posts suggesting that he opposes the bailout on public choice theory grounds [to oversimplify] and citing economists). On this reading you have no disagreement with the substance of Ilya's post, making the tone of your post seem simply bizarre. (It would have made more sense for you to say Eric Posner and Harry Reid are wrongheaded.)

You obviously read Ilya's post as a substantive argument against the bailout. I think you're wrong, but this makes your criticism understandable. (Though perhaps a little hypocritical, since you had also taken a strong stand on the bill without posting on the substantive arguments.)

Posted by: JP | Sep 30, 2008 1:20:58 PM

Re: Patrick's and Jonah's responses above, I think what we have here is a failure to communicate.

There's some sort of weird disconnect occurring here. As his update makes even clearer, Ilya's post is not about the source of our current difficulties. Thus Jonah's main point, that we need to worry about the credit market, not the stock market, is completely nonresponsive to Ilya's post. (I happen to agree with *both* main points, and I don't think I have inconsistent beliefs (of course, no one ever does).) Ilya's main point is about what sort of evidentiary weight to give the stock market drop yesterday. His answer: not much. It's a noisy signal at best. This is completely consistent with the idea that we need to be worrying about the credit markets, not the stock market.

I look forward to more explanation of what's going on in the credit markets. I have a bunch of questions on that front: http://www.concurringopinions.com/archives/2008/09/the_political_b.html#c363112

Posted by: Bruce Boyden | Sep 30, 2008 1:08:26 PM

Professor Somin is a big boy. If he can't handle the "criticism" that was directed his way in this post, then he needs to get out of the debate.

Posted by: Anonity | Sep 30, 2008 12:12:42 PM

Ok, this is my last comment on this post.

JP, Somin's post isn't limited to responding to those specific claims. That's why I wrote this post. Second, the use of "dumb" was a characterization of someone else's critique "A argues that it was dumb not to do B". It was short-hand, and it was not my critique I was characteerizing. Perhaps it was lazy of me not to use another word. Fair enough.

Third, and I'll say it again, I didn't call Somin dishonest (see updates and comments above on this). Fourth, the stock market is a sideshow right now. I don't see what's wrong with noting that, tonally or otherwise.

Fifth, maybe "wrongheaded" was too strong. I don't know. I'm not going to get into going through various posts to look for all the times someone else used strong language, but jeez: I had no idea that feelings were so brittle in the blogosphere. I've been called worse by students and seminar participants.

Sixth, you write:

I understand that you think Ilya should be focusing on the credit markets. What I don't understand is why. As he notes, he's not a macroeconomist.

The reason why he should focus on, or at least mention, credit markets is that he's expressed a strong opinion on the need for a bailout of the form that was defeated yesterday. Yet he hasn't at all addressed the reason that its proponents give for the bailout's need. No one's forcing Somin to take a position on the bailout, but if he's going to do so, then it seems reasonable to expect him to at least address the reasons why some people -- including, I would bet, the vast majority of macroeconomists -- think it's necessary.

And frankly, I don't see how not being a macroeconomist is an excuse. I'm not a macroeconomist, either, but that doesn't stop me from reading the writings of those who are and gaining an informed opinion. A broadly worded letter isn't a substitute for doing that. Moreover, many of the issues involved here are as much *micro* as macro! Asymmetric information, adverse selection, multiple belief-driven equilibria, the fact that credit markets are the bridge between savers and investment on the economy's real side: all of these things have strong microeconomic foundations, and all of them should be accessible to any trained economist willing to become informed.

My criticism isn't that Somin hasn't run out and become an expert on credit markets, it's that he has taken a strong stand against a bill that is meant to deal with credit markets without ever addressing the crisis occurring in them.

As for my writing more on credit markets, obviously that would be a good idea. I'll try to do so.

Posted by: jonah gelbach | Sep 30, 2008 11:37:09 AM


I'm sorry, but I just disagree on that point. If you made that statement about me, then given that I respect you, I would consider why. My first move would be to decide whether your either/or assertion was correct. Having concluded that it was, since I'm not a racist, I'd have to conclude I was being lazy in doing whatever made you write what you did. I would not, however, conclude from that sentence that you are calling me racist. I guess we just read that sort of language differently.

As I wrote in my previous comment, I didn't and don't think Somin was arguing in bad faith. The fact that, in reply to my post, he updated his post to acknowledge the disclaimer in the letter is in fact evidence that he is not dishonest. The fact that it was necessary, however, is evidence that he was lazy in citing it last night without noting the disclaimer.

Anyway, I'm honestly sorry that people drew the bad faith inference. I'll update the post to make clear that that wasn't and isn't my point.


Posted by: jonah gelbach | Sep 30, 2008 11:18:44 AM


As your post notes as an aside ("In fairness,..."), Ilya's post seems to be a limited response to specific claims regarding the stock market drop. To the extent your argument is simply that Ilya is addressing the wrong issue, it seems misdirected, particularly given your choice of words (e.g., wrongheaded, dumb, sideshow, lazy, dishonest).

I understand that you think Ilya should be focusing on the credit markets. What I don't understand is why. As he notes, he's not a macroeconomist. As you keep reminding us, you are an economist. Why don't YOU comment on the credit markets?

Posted by: JP | Sep 30, 2008 11:18:11 AM

Moreover, in reference to the now 6-days-old economists' letter, I specifically suggested that "my money's on lazy", rather than dishonest.

But Jonah, the decision to bring up the possibility that Ilya was being dishonest speaks volumes. So, for example, if I wrote, "Jonah is either just lazy or racist -- but my money is on him being lazy," the effect of that is just to leave the impression that I think you may actually be racist.

Posted by: Orin Kerr | Sep 30, 2008 11:06:46 AM

First, as Patrick notes, Somin responded to this post in an update. As I made clear in the comments to his post, I do not think that Somin understood my criticism. As my reply to his reply to that comment (exhausted!) makes clear, he still doesn't seem to have understood my point (I haven't yet checked to see whether he replied to my 2nd comment). My point is not that he is wrong about the stock market: it's that, at least for now, the stock market is the wrong topic and the wrong metric. For instance, I just checked, and the Dow, S&P500 and NASDAQ are all up this morning, even as the TED spread is still well over 3. The credit market is in tatters, and that is why everyone is talking about a bailout.

Second, let me address Bruce Boyden's suggestion that by writing "Neither of these defenses is serious" I have somehow impugned Somin's motives. I completely disagree with Bruce's view that

the most natural reading of this statement is that you are claiming that Ilya doesn't actually believe his own arguments -- that he lacks good faith, for some reason.

That's not at all a natural reading, at least not to me. First, while I characterized his positions as not serious, I did not characterize Somin or characterize his state of mind, on which I neither have nor claim direct knowledge. One might draw an inference that a person making an unserious argument is not a serious person, but one might also draw the inference that the person doesn't intend to but nevertheless does make an unserious argument. Moreover, in reference to the now 6-days-old economists' letter, I specifically suggested that "my money's on lazy", rather than dishonest.

In sum, I do not think it is a fair reading of what I wrote to suggest that I challenged Somin's good faith. I have no reason to do that, did not intend to do it, and don't believe that it is reasonable to accuse me of that given what I actually wrote.


Posted by: jonah gelbach | Sep 30, 2008 10:57:02 AM

Though some Democrats and Republicans voted against the bill out of pure political peevishness, I think there is a moderately strong argument that the Federal Government has no power under the Constitution to take the steps which it plans.

Of course, the counterargument is that, under the CRA and similar acts which more or less forced institutions to lend to those who were poor credit risks, the Federal Government had already overstepped its bounds.

To which, I would reply that repairing damage done by bad legislation is not to attempt to compensate for its effects in a broad sweeping way, but to repeal the legislation or modify it, which is constitutional action.

Benjamin Franklin's statement comes to mind - "They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." Such would be the effect of the legislation which now stands before Congress. Jefferson noted in a letter that "We are not to expect to be translated from despotism to liberty in a featherbed." This is true, but we may find ourselves transported back to despotism in the same....

Posted by: Jonathan | Sep 30, 2008 10:54:04 AM

In an update it appears that Somin has yet to grasp Jonah's point as he states that the latter has done nothing to refute his argument that the stock market in this instance is not an accurate reflection of the state of the economy: "today's stock market crash does not prove that the bailout was a good idea because stock market conditions - especially short term swings - often don't reflect the underlying condition of the real economy." But again, this is beside the point, for Jonah is saying "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." In other words, it's ridiculous to claim that Jonah has said nothing to disprove his general arguments about the stock market and the economy (or that 'his post isn't responsive to the real arguments that I raised in mine') as Jonah is saying those arguments are a distraction from what is the more important issue.

Posted by: Patrick S. O'Donnell | Sep 30, 2008 10:35:13 AM

Jonah, here's one element of tone you could correct: "Neither of these defenses is serious."

I think the most natural reading of this statement is that you are claiming that Ilya doesn't actually believe his own arguments -- that he lacks good faith, for some reason. Ilya seemed serious to me. There's a big difference between being wrong, and being deceitful.

I also agree with JR's reading of Ilya's post. And in general, I don't think the value of a policy is accurately gauged by the reaction in the stock market. After all, the stock market tends to fall whenever a Democrat is elected president. Does that prove that voting for Democrats is a "dumb move"?

Posted by: Bruce Boyden | Sep 30, 2008 10:25:25 AM

I should make it clear that, whatever Somin's post was about, I did not intend to imply that what investors think is irrelevant inasmuch as "the *tense credit markets tightened further* as anxiety-ridden investors rushed into super-safe Treasury securities, pushing their yields down."

Posted by: Patrick S. O'Donnell | Sep 30, 2008 9:14:38 AM


I think you've mischaracterized Somin's post, as it was not about what investors think in the first instance, that being an ancillary point to the main thrust of the post which was designed to further support his argument that "the just-defeated bailout has all the classic indicators of a massive interest group power grab in the guise of an 'emergency measure.' I also draw some reassurance from evidence showing that numerous prominent economists across the political spectrum also believe that the bailout is ill-advised and likely to cause more harm than good to the economy in the long run. What makes the present situation different from many past crises is that the power grab has - so far - failed."

Somin is against the bailout. The title of his post says it all: "Why the Stock Market Drop Doesn't Prove that Congress was Wrong to Reject the Bailout," thus his post is designed to illustrate that proposition, the regnant assumption of which is that the legislative "bailout" is wrongheaded if only because it is, in his words, a "massive interest group power grab." Jonah, and I think correctly, argues that this is not about the stock market as such but about "credit markets" and thus to some extent the stock market argument serves as a strawman or distraction from the more pertinent and pressing issue, i.e., credit markets. Several articles I've read recently in the business section of my paper suggest that this is absolutely true.

And to bring up the letter signed by economists penned *before* the legislative proposal reinforces the argument that Somin fails to appreciate what is at stake here.

In conclusion, I think it is fair to say that regarding both Somin's post and Jonah's response, you've missed the main points of both and that it may be *your* reading comprehension that leaves something to be desired.

Posted by: Patrick S. O'Donnell | Sep 30, 2008 8:50:29 AM

You've completely mischaracterized Somin's post. His main point is that the fact that the stock market went down because the bailout failed, or might go up if it passes, doesn't mean the bailout is a good idea, it just means investors think it will help their investments. This could mean that they think it will help the economy overall, but it may just mean that they think the bailout is a huge subsidy to them, a transfer of wealth from the public at large to the investor class. Even if the former is true, they could be wrong, as they were with Nixon wage and price controls. You haven't addressed his point at all, and you either lack reading comprehension or your post is dishonest.

Posted by: JR | Sep 30, 2008 8:18:19 AM

Oh, I just noticed the Dow comment was directed at Ilya.

Posted by: Chris | Sep 30, 2008 7:41:57 AM

Is there some market-capitalization-style gauge of the, uh, crap-depth of the bond markets? Is there a way to assess how much value in bonds suddenly disappeared yesterday?

In defense of Posner, he's depending on Wilshire, not the Dow, to get his market-capitalization figures.

Posted by: Chris | Sep 30, 2008 7:39:35 AM


One other thing: I don't think there's anything wrong with the tone of my post. It's pointed, but there's nothing personal in it. The comment about laziness is inarguable: events have moved past the point at which that letter can reasonably be deployed in the way Somin uses it (which was as a basis for explaining his position on an issue on which he says he's not an expert).

That said, if you think there's something wrong with the tone of my post, let me know what, and I'll happily consider your point.


Posted by: jonah gelbach | Sep 30, 2008 1:51:49 AM


I recognize that. But Somin's posts (at least, the ones I link here) are simply beside the point. I understand that some people will come to a different conclusion based on the facts. But the stakes are very high here, and there isn't a say-something constraint.

I don't think it's unfair to expect them to defend coming to the conclusions they draw based on the *relevant* facts.


Posted by: jonah gelbach | Sep 30, 2008 1:46:52 AM


As just a matter of tone, I think it's worth emphasizing that we're dealing with a genuine difference of opinion among good-faith actors here. We are all trying to do our best to do what is best for the country; we're just all of different views as to which is the best course.

Posted by: Orin Kerr | Sep 30, 2008 12:17:19 AM

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