There are a lot of commentators on the bailout with very little grasp of finance who are confidently opining on the bailout based on one of two broad principals:
1) Markets good, government badThey then proceed to construct a metaphor which illustrates why we [shouldn't do anything/should do something different/should do exactly what their political leadership wants]. The bailout is like the Titanic: the ship would have been better hitting the crisis head on than trying to turn when it's too late. The bailout is like the Iraq war: the Bush administration is trying to ram through plan without proper deliberation. The bailout is like a game of chicken: we need to rip off the steering wheel and throw it out the window to show the bankers we are serious. The bailout is like the Treaty of Westphalia. The bailout is like learning to needlepoint. The bailout is like this really cool cloud I saw the other day that totally looked exactly like Marylin Manson wearing a zoot suit.
2) Markets bad, government good
One can construct any sort of metaphor (okay, right, or simile) to demonstrate why whatever you oppose is folly. But, as you'll notice whenever you read an op-ed on any subject you actually know something about, 95% of those metaphors are glib hogwash.
If you cannot explain in clear English exactly what all the salient questions and facts are about the bailout, then please do not attempt to convince others that it is best understood in terms of Dirty Harry movies or the time your Aunt Mavis lost her car keys in the garbage disposal. It is possible to have principled and intelligent support for today's vote. But such support cannot be arrived at solely through studying auto accident statistics and the collective writings of Norman Vincent Peale.
"Markets good governments bad" has been the trademark phrase and essential (complete) policy and analysis of the GOP--and libertarians--for years.
And now you don't like them?
What changed?
Someone needs a hug.
But it was precisely for want of the right metaphor that the 'bailout' plan failed.
For of course it wasn't intended to 'bailout' the banks; it was designed to fix the prices of mortgages whose prices were unknown, and thus unfreeze the credit system.
If Bush had gone on tv like Reagan and explained the problem, using charts or even metaphors, to people in a way they could understand, then it would have passed.
But because no one in charge in DC has any imagination, we were stuck with vague appeals to trust in expertise, coming from an administration that has proven itself unworthy of that trust.
Don't blame metaphors for the ignorance of blog posters.
Great site!
Would you like a Link Exchange with our new blog COMMON CENTS where we blog about the issues of the day?
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Would you like a Link Exchange with our new blog COMMON CENTS where we blog about the issues of the day?
Steve-o, somehow I think you didn't pick the right day to make such a request of our Megan.
I'll do what Ron Paul says, metaphorically speaking.
Megan,
You could have made this post on just about any day on just about any given topic. That doesn't make what you said any less true.
By the way, are you being paid overtime? It's a late night for you. (Not that I'm complaining.)
Ah, you preempted my simile/metaphor nitpick in the penultimate penulitmate paragraph; I'm glad I read again before posting.
But, I think I still got you on the principal/principle thing though.
There is also some sort of internet law when you are trying to be a pendantic a**, you will of course make a mistake.
Moronic blog comments are like moronic speeches by the Speaker of the House... oh wait, nevermind.
(With apologies to Jack Handy) You know what the bailout is like? It's like losing your keys in a river of molten lava; they're gone man.
"All theories are metaphors, and all metaphors are lies." Deirdre N. McCloskey
Well, I was about to say that today's vote was like Trotsky's initial rejection of the Brest-Litovsk Treaty in favor of "no war, no peace." The result of course was that the Germans just advanced deeper into Russia, and the Bolsheviks had to sign an even more humiliating version of the treaty. But Trotsky later justified this by saying it was necessary to *show the Russian people* just how hopeless resistance to the Germans was--even if the result was worse terms than would have been obtained by immediate acceptance. Otherwise, the workers and peasants would think the Bolsheviks were traitors and German agents (actually, they *had* taken money from the Germans but that's another story) whereas now they would know that the Soviet government was just being "realistic."
Stock market tanking = German tanks advancing. It will persuade "swing voters" there is no alternative to the bailout--even though the delay actually costs the taxpayers more money.
However, since this is a metaphor, I promise to make no use of it...
If you cannot explain in clear English exactly what all the salient questions and facts are about the bailout... then don't ask for seven hundred billion dollars.
And let's not forget that language--and mathematics--are metaphoric--or more generally figurative--in their relationship to the real world.
Without metaphors, you can't say anything.
Megan, My God! do I agree with you!
I was listening to this academic pontificate on NPR the other day about the 'shadow economy' and I was struck by how many people involved in this are resorting to all kinds metaphors to (thinly) disguise murky thinking.
The basic problem for ordinary folks here is that we don't know what the hell is really going on. Most of the commentators don't know either - so they resort to condescending metaphors to 'explain' things to us. As if we were small children and they are simplifying things to our level.
When I hear people talking like this, I just assume that they have no idea what they are talking about.
Yes.
I've spent most every waking minute of the last two weeks trying to understand it, explained it, write clearly about it. It can be done.
It can't be done by invoking Ronald Reagan on a white horse sweeping Ayn Rand off her feet and riding with her into the gold standard homestead.
OK, here's what I understand from trying to study it. Forgive me if I speak from ignorance below.
Treasury says: These "mortgage backed securities" (MBS's) aren't really worthless; people just won't touch them due to fear. (Owners of MBS aren't insolvent, they just can't get cash for them - this is a LIQUIDITY problem.) So we will start paying money for them, especially the worst of them, and everybody else will follow suit.
Lots of other people say: MBS's are largely worthless especially if real-estate continues to decline. Owners of MBS's have a SOLVENCY problem since what they own is basically worthless. Worse yet, people who have insured MBS's with "Credit Default Swaps" (CDS's) also have a solvency problem. This makes the MBS's possibly uninsured in effect which of course doesn't help their value either.
I believe a large portion of MBS's are actually worthless - one of the worst examples is an MBS representing 2nd mortgages in the 2006 California real estate market where the borrowers put down 0.5% overall & half are no-doc loans. I can see getting 0% back on that one - 1/6 of the loans were in default a year later.
If real estate goes down by 30% overall, losses from defaults will probably be well over a trillion dollars in the overall mortgage market. (30% dive in real estate means that even someone conservative who put 20% down in 2006 can save a lot of money by walking away!) That money will be lost by someone, by players in the financial market. Nobody wants to loan money because (a) whoever needs money is likely to become bankrupt and won't pay it back, and (b) they need the money themselves because much of their assets are worthless and (c) somebody could come asking for a bunch more cash from them (perhaps calling a debt in) because their own credit rating dives or their collateral (like an MBS) is found to be worthless.
I personally believe that Paulson wants to dump a lot money into the system buying MBS's, which will reinflate the assets somewhat, so that the financial system has some time to unload its debt, admit to losses on MBS's, and the whole system doesn't just grind to a halt.
It's not really a liquidity problem, it's a solvency problem, and Paulson wants to keep the solvency problem from destroying the financial system by pretending it's just a liquidity problem.
The idea is to avoid a chain reaction in which Party A's bankruptcy triggers losses for Party B, which lowers its rating and makes it need money right now ... etc ...
For example, the money-market panic was triggered when a large well-regarded money-market fund had to admit losses due to Lehman's bankruptcy making its Lehman bonds worthless, resulting in a run on that fund. (Money-market funds are the source of short-term loans for corporations, so this is not good for business.)
Sequential collapse is probably worse the faster it happens, and I think Paulson's goal is to slow it down, that's all, giving everyone time to reduce their exposure to everyone else ("deleveraging"), mark down their losses, accumulate a cash buffer, and so on.
Merrill Lynch almost survived (they were bought instead of failing outright) because they were willing to do the above.
The $1 trillion or $1.5 trillion or whatever which is going to go missing in the real estate market is going to cause a lot of pain, but Paulson wants it to blow the markets up in a fizzle if possible, not like a nuclear explosion.
But is buying toxic trash the best way to keep the owners of toxic trash solvent? Maybe not; the government could instead get equity in those companies in return for their cash transfusion (restoring solvency), for example.
This might be better than trying to keep up the market for MBS's, an effort doomed to failure which distorts the market anyhow, perhaps inspiring companies to hold on to their toxic trash instead of taking the loss and selling it for $0.30 on the dollar - you get the idea.
Oh, by the way, I do not believe that MBS's are impossible to evaluate (one could pay the $$ necessary to inspect the status of every one of many thousands of mortgages in an SPV trust); I think the real problem is that nobody wants to admit to their losses, which they might be forced to if their MBS's were honestly evaluated.
I would like to outlaw analogies, myself. It actually takes both skill and depth to construct a useful comparison. You know you've failed when people start arguing the analogy, instead of the issue it ought to be serving -- something that happens more often than not.
The problem is you have to have SOME way to explain it to regular people Megan.
For a forum like this where most people know what they're talking about, great.
But for the average American? This just isn't cutting it. And THOSE are the people who are preventing this deal from going through. (Frankly I agree with them, but that's beside the point.) They're the ones calling their representatives and convincing them to vote against this.
It's YOUR job (or at least economists, Treasury officials, Paulson and those who support this bill) to CONVINCE others that it's the right thing to do.
Starting to see why being a politician is such a hard thing, huh, Meagan? But you KNOW it's right and it should be so obvious. Why won't people just LISTEN?
Sorry people don't work like that.
As for Paulson, this is why you need someone qualified as Treasury Secretary. It's not enough to simply be SMARTER than everyone else. You have to convince them. Now you're starting to understand what some of our complaints about certain economists have always been.
And maybe, just maybe, you're starting to realize the value of Robert Rubin.
P.S. Others are right you should have started preaching this to Republicans a long time ago. They are the ones who have spent the past 20 years beating the country over the head solely with the simplistic notion of: markets good, government bad dichotomy.
So Megan, do you see anything wrong with Henry Blodget's suggestion? His idea (which is really amplifying an idea of John Hussman's, to be fair) seems like a simple, elegant answer that avoids both the we-need-to-overpay problem and the ludicrous suspend-the-mark-to-market-rule idea. What do you think? What am I missing?
So everyone who doesn't agree with you, or have - in your esteemed estimation - is a moron and should basically shut up? Are you going to ban yourself from this site?
I happen to agree with you that we need(ed) to pass a bailout package to avoid a meltdown, but this righteously condescension is just too much. You're one of the very people you regularly rail against.
I've noticed you have a pretty weak understanding of foreign affairs, are you going to ban yourself from ever commenting on them?
Get it together McCardle!
John from Concord
Several people have come up with plans very like Henry Blodget's suggestion. They are all addressed to what is the urgent problem: seeing that the banks have enough equity capital so that they go back to trusting one another sufficiently to lend to one another. The Paulson plan addressed the less urgent issue of how to deal with the overhang of bad and dubious debt.
As amended in the political negotiation, the Paulson plan was a good deal better than nothing. If an alternative plan on the line of Blodget's suggestion gets adopted quickly, better still. If no plan gets adopted, the economy will be in danger.
Megan,
Your point is important. Language matters greatly in crisis management. If everyone goes on firing off metaphors and similes, the economy will be in dangerous waters, in the fog, without a compass.
Megan,
"So everyone who doesn't agree with you, or have - in your esteemed estimation - is a moron and should basically shut up?"
Tyler's grammar usually ain't that bad. Forgive him for once? But he is an intersting guy (if with a very spotty grasp of foreign affairs), and it would be interesting to know what his point was?
To be fair, this and many other arguments came before the Titanic metaphor. Also see Marginal Revolution and Econlog material.
While I appreciate the lecture, I'm not confident you have a firm grasp of the financial fundamentals at work either. If you did, you wouldn't believe that the government spending money it doesn't have, to buy up "assets" (debt) at a price that no private buyer is willing to pay, is a viable fix. And your glossing over how fractional reserve is relevant to this - it's not just about government forcing banks to loan money to bad risks - that would not have been possible if banks couldn't create money out of thin air. You'll have to forgive some of us if your cheerleading over the need to immediately pass the bailout makes us suspicious of your claimed political philosophy and financial understanding. No offense.
"If you cannot explain in clear English exactly what all the salient questions and facts are about the bailout, then please do not attempt to convince others..."
This is essentially why the bill failed. Telling the public, "We weren't smart enough to see this coming, we still have no idea how bad it really is, and we don't know what we're going to do get out of it, but meanwhile you need to trust us with a hell of a lot of your money," is not a recipe for success.
Thank you for your explanation TheWesson. Maybe you could take Paulson's job.
Oh, by the way, I do not believe that MBS's are impossible to evaluate (one could pay the $$ necessary to inspect the status of every one of many thousands of mortgages in an SPV trust); I think the real problem is that nobody wants to admit to their losses, which they might be forced to if their MBS's were honestly evaluated.
Absolutely right. The _correct_ price on a lot of that paper really _is_ 0. The "hold to maturity" price on a lot of the rest is less than that stated on the holder's books.
And everybody has realized this. Most institutions are still trying to figure out the extent of their own exposure, and know squat about that of other institutions. That's why LIBOR is shooting through the roof. Everyone worries they are insolvent, knows some of the players are already are, and that more soon will be, but nobody knows which ones.
Spreads will rise until people are sure every surviving bank's books actually reflect market reality. The effort to relax mark-to-market is a seriously wrongheaded move in the opposite direction. Why not just encourage banks to lie to each other?
David T.: Outstanding historical analogy.
Metaphors may may not work but blindness to historically relevant parallels is not the answer. And while the Iraq war per se may not be relevant, the legislative rush to judgment in an atmosphere of fear and very limited information, and villification of doubters and opponents, doesn't seem all that far off.
The Wesson: I'm pretty much with your analysis. Paulson's idea of a reverse auction to enable "price discovery" struck me as an effort to discover the price at which investors could afford to sell MBS and CDSs (how low could they afford to go while still maintaining the pretence of solvency), not to discover a market clearing price in the sense of the market's best estimate of the securities' actual worth. It was a straight subsidy not so cleverly disguised as something else.
Wow, Megan, another false equivalency howler! There are indeed many people who subscribe to "Markets good, government bad," and who base all their policy prescriptions on this rule. (Many are among your readers.)
But there is PRACTICALLY NO ONE who says or believes, "Markets bad, government good." The idea that "liberals" say or believe this is a total fabrication by the right.
Can you name any liberal who advocates abolition of markets in favor of government control? Who supports abolishing the stock market, for example? Who wants the government to take over Apple Computer or General Foods or Pfizer? (And no, advocating regulation or taxation of companies is not the same as taking them over. My car is registered with the government, but I still buy it, sell it, and drive it when and where I want.)
The fact is that there is no one who says, "Markets bad, government good." The most anyone says is, "Markets need some government oversight to make sure they operate fairly and efficiently." That is NOT the same thing.
It's convenient to pretend that the extreme loonies on the right, who have had enormous power in Washington for years, are balanced by an equal force of extreme loonies on the left, but it's absolutely false.
The Peace of Westphalia wasn't a treaty, it was a combination of a couple treaties. There was no "Treaty of Westphalia".
(...which makes it a good comparison, since there's apparently no bailout, either.)
I see we have more "principled and intelligent" commentary from Megan McCardle who writes in this post:
If you cannot explain in clear English exactly what all the salient questions and facts are about the bailout, then please do not attempt to convince others that it is best understood in terms of Dirty Harry movies or the time your Aunt Mavis lost her car keys in the garbage disposal.
Even as she wrote in her preceding post:
Pelosi screwed up royally. She is the Democratic Tom DeLay.
Pelosi cut a deal in which, as far as I can tell, every single Republican in a safe seat had to vote yes so that the Democrats could maximize their no votes. Given that the Republican caucus is pretty much in open revolt, this was beyond moronic.
It is this criticism of Nancy Pelosi which is "beyond moronic." The Democrats delivers a 2-1 majority for the bill and the Republican delivered a 1-2 minority for the bill - yet the bill failed because of Nancy Pelosi. Utter and total bullshit.
There is more than enough blame to spread around for the financial crisis facing the country. But with specific regard to this bill the blame is appropriately given to Boehner who failed to deliver his votes, the (overwhelmingly Republican) reresentatives who voted against it - and those in the media who blame Nancy Pelosi.
Here's my metaphor free attempt:
The problem with the bailout is that it addresses the wrong problem, liquidity. I think the central issue here is solvency which is not addressed in any of the solutions I've seen proffered. If confidence in the banking system (i.e. believing their fellow banks are actually insolvent) is the central issue here, how come we are not learning the last great banking crisis of confidence, the Great Depression? How did they restore confidence? It certainly wasn't by papering over the issues with obscene amounts of money. It was through the Banking Relief Act of 1933. This act shut down the banks (Bank Holidays) for 4 days and had them open up the books to government inspectors in order to determine who was solvent and who wasn't. Those that were solvent were reopened with the Gov's seal of approval and those that weren't were addressed and disposed of. This is a comprehensive solution that directly addresses the root cause of the credit woes that involves minimal taxpayer dollars and has been historically vetted. All of these are aspects that the current plan cannot even come close to claiming.
I have yet to hear why this idea, which on its face seems far superior to the current one will not work or is not preferable. That is unless you are one of the insolvent institutions hoping that you can paper over your losses with taxpayer money.
Hey Megan, the moral force of your argument against metaphoric descriptions of social problems erodes as soon as you literary devices in your jeremiad against literary devices (see, for instance, “bailout = game of chicken”; “Pelosi = DeLay”; “like Marilyn Manson in zoot suit.”) I agree with Tyler: this righteously [sic] condescension is just too much. You're one of the very people you regularly rail against.” On the other hand, I don’t expect much self-reflection from a Chicago MBA drone. Time to cut back on your lattes.
Everyone go back and (re)read The Wesson's comment. That is as good and succinct an overview as I've seen. Sadly, it doesn't really point to the obvious solution to the problem, but it does fairly characterize it. IMO.
Uh, Honey, you were the one quoting about cats and bells like, 19 hours ago.
My God, you're so un-self-aware I'm surprised you even know that you exist. Of course, if Des Cartes was right, maybe you don't.
Tom Riedel,
The problem is that the bank holiday and subsequent legislation were not very successful in curing the depression.
Actually, all of Peale's works were a coded message intended to deliver us from this very problem.
I know, I found it hard to believe, myself.
Also, Nutella - Megan's post referencing Aesop was about the politics of the bailout bill vote, which is not the topic (the best way to fix the problem, and whether there is one that needs a fix) she's suggesting people not use metaphor on.
This post that you're commenting on was not a call to never use metaphors - it was a call to not use metaphors to cover for a lack of understanding and/or inability to communicate the nature of a problem "in clear English".
Further, in the previous post the metaphor of belling the cat was used only as a secondary example to sum up what had already been expressed "in clear English", rather than as a replacement for same - thus, again, conforming with the principle suggested here.
But apart from that, you're completely right!
I agree that TheWesson seems to have a better grasp on the issue than most of the people who are paid to comment on this.
I also agree that the issue is not one of liquidity, but of solvency and the banks' refusal to deal with it.
One aspect of this that bothers me is that I keep hearing that the values of the MBSes are unknowable. This seems absurd. Surely the contents and returns were easy enough to track during the good times, in order to entice so many buyers. Unless MBSes were marketed as some sort of mystery prize, which I find hard to believe. The underlying information is there, it's just that no one wants to look at it. And frankly I've no willingness to authorize Paulson to use $700 Billion to do what the I-Banks, etc. don't have the balls to do. And apparently I'm not alone.
And if I may, I'd like to complain about the absolute lack of real analysis of the problem in the media. Much like election coverage, the coverage of this debacle seems more focused on feelings and political games. "What are the Republicans' feelings about Pelosi's speech?" "What's the mood on Wall Street?"
I realize that most journalists barely know enough to come in out of the rain, but seriously, is it so hard to ask questions about the meat of the matter?
Thanks Matt.
I liked this explanation of the foundations of the crisis:
http://www.financialsense.com/fsu/editorials/martenson/2007/1217.html
Scale of the problem:
US banking system has somewhat over $1T in capital. 10% to 15% net loss on $11T of real estate loans wipes out the entire capital of US banking system.
Financial connections distribute the problem to other parties:
Loans to an insolvent bank could be worthless.
CDS's (insuring the solvency of another party) help spread the problem.
Other means of "risk management" help spread the problem to parties unknown as well?
The above article quotes Von Mises:
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."
I don't understand all that, but the upshot is that either one gets a collapse in lending (understandable) or the problem is inflated away (by the central bank? this part I do not understand.)
So one solution is simply to induce inflation. Sounds good, right? If the dollar were worth 30% less, then the current housing market would be reasonable and therefore MBS's would be worth something, since defaults would go way down. However, inflation has very bad consequences, I am told, and is difficult to get rid of. I imagine that the Chinese would not like their huge stock of Treasury bonds to be worth 30% less, for example, and I am told there are severe consequences if the Chinese suddenly stop buying Treasury bonds.
I do not know what actions by the central bank are inflationary, but one would think stuffing huge quantities of money (borrowed? created?) into the banking system would be inflationary. There's asset inflation (Wall Street inflation) and also wage/price inflation (Main Street inflation.) Perhaps someone can help me here.
Anyhow, sounds like there is a choice of strategies in this crisis, and I suspect that not allowing credit contraction chooses inflation in effect (not sure how.)
The Wesson's quotation of Von Mises is apt, and points to a fundamental disagreement between those economists trained in the Austrian mold and those more influenced by Friedman and the Chicago School. For people like Von Mises and Hayek, there is simply "no means of avoiding the final collapse of a boom brought about by credit (debt) expansion." You can try either to induce or delay the collapse, but you cannot escape it. The Chicago School generally don't agree with this--for reasons having to do with their different understanding of how debt markets work--and so are more optimistic about being able to effect a "bailout" or "rescue" that avoids the "final collapse" invoked by Von Mises.
Apart from all this, however, and apart from whether anyone can explain this "crisis" in terms that Megan would deem acceptable, there is good reason not to trust what Paulsen, Bush, etc. say for two simple reasons: (1) they have not up to this point been correct in their forecasts, and (2) any plan they put forth, and any description of the "crisis" necessitating that plan, is going to serve the interests of the corporate class, who are exactly the people whose influence and practices got us into this mess (excuse the metaphor) in the first place.
I am always distrustful of economists who, on the one hand, speak as if the fundamental "laws" of political economy are almost self-evident to anyone who takes ten minutes to observe human nature and, on the other hand, when things get dicey attempt to cut off disagreement and argument by wringing their hands about how "complicated" it all is.
I have a friend arguing against for the notion that the CRA from the Clinton Admin caused most of the problems. I'd be interested to hear countervailing opinions.
tim.2wgroup.com/blog/archives/001911.html
tim.2wgroup.com/blog/archives/001909.html
He also argues that the Republicans were pro regulation and the Democrats opposed.
tim.2wgroup.com/blog/archives/001908.html
I find that the Decider's track record does not inspire confidence. So I'm more inclined to seek the advice of an economist or three - particularly ones who correctly identified the bubble as a bubble when that was against conventional wisdom (e.g. Krugman), or predicted the credit crisis years before it was obvious (e.g. Roubini).