Greg Mankiw gets an email from Robert Shimer, who writes,
looking back over the last 13 months, it should be clear that the Fed and Treasury have repeatedly underestimated the extent of the problem. In such an environment, the distributed knowledge of professional economists and other imperfectly-informed observers may be superior to the knowledge of the Fed staff. In other words, you write, "In his capacity as Fed chair, Ben understands the situation, as well as the pros, cons, and feasibility of the alternative policy options, better than any professor sitting alone in his office possibly could." That may be correct, but I am not convinced that he understands the situation better than the collective wisdom of all professors.
Even better than the distributed knowledge of professors is the distributed knowledge of markets. It is not just efficiency at issue. There is a fundamental moral issue.
If my broker gives me bad market advice, I don't have to take it. (Actually, I have never taken advice from a broker, and I never will.) But if Henry Paulson thinks that there is a profit opportunity in risky mortgage securities, I have no choice but to invest. Moreover, even though I think that Barney Frank's affordable housing loans are bad for borrowers, bad for lenders and bad for the country, I am coerced into funding those loans.