Arnold Kling  

My Attempts to Stop the Stampede

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Will the Paulson Plan Turn a P... The Hold-to-Maturity Nonsense...

Hear I am on the radio. I start at about minute 5:30. There is a little back and forth including other guests before they finish with me near the end.

Late this afternoon, Bill Niskanen of Cato and I met with Congresswoman Mary Bono Mack (R, Ca.). It was therapeutic for me, even if the train has left the station. I made the case against the bailout. She asked about the Hold to Maturity idea, where the theory is that while these securities are illiquid if we just hold them to maturity we will be fine.

I responded that the securities are like cities in the Gulf Coast with Hurricane Ike coming, before they know where it will make landfall. Hold to maturity is like refusing to evacuate. It might not land on you, in which case you're fine. On the other hand, you could be Galveston.

(UPDATE:
Along these lines, I am not sure what to do with Bryan's bet. The following could both be true:

1. The probability that the bailout earns a profit is greater than 50-50.

2. The expected value (meaning the mathematical expectation) of the bailout is very negative.

For example assume that there are three equally-probable scenarios. In scenarios 1 and 2, you win $1. In scenario 3 you lose $1 million. If that is the distribution, you might want to bet that the plan makes a profit, because you have a 2 out of three chance of winning. But you still would not invest your own money in the plan.
(end update)

Bryan and I are here, along with a bunch of other economists polled by Reason Magazine.


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COMMENTS (9 to date)
David Thomson writes:

“It is not a coincidence that Paulson is the former CEO of Goldman Sachs and is now bailing out his friends.”

--- Frederic Sautet

This is an indirect way of rightfully blaming the Democratic Party for this mess. Never forget Robert Rubin’s position within the Clinton administration. In 1999 he minimally stood by while lending institutions were forced to provide mortgages to credit unworthy minorities. This started the ball game rolling. If anyone tried to object---they were often charged with racism.

Unit writes:

Arnold,

your commentary during this crisis has been excellent.

Grant writes:

One of the guests says money was made by similar government investments during the S&L crisis. Did things really work out this way?

Arnold, thanks for all your commends during this. Its been very educational.

Jeff writes:
One of the guests says money was made by similar government investments during the S&L crisis. Did things really work out this way?

No. The RTC did sell everything off, and they got better prices than some expected, but the entire S&L rescue operation still cost somewhere north of $80 billion, as I recall.

David Thomson writes:

I finally got a chance to view Arnold Kling's interview on Reason.com. Wow, he seems to be living in a dream world. The top bosses of Freddie Mac could have cared less about his scholarly studies concerning mortgage risks. They threw his stuff into the nearest garbage dump. Nope, these Bill Clinton appointed bureaucrats were committed to providing mortgages to minorities regardless of the extraordinarily high danger of massive defaults. Political correctness trumped rational thinking.

US writes:

What Unit said.

SheetWise writes:
For example assume that there are three equally-probable scenarios. In scenarios 1 and 2, you win $1. In scenario 3 you lose $1 million. If that is the distribution, you might want to bet that the plan makes a profit, because you have a 2 out of three chance of winning. But you still would not invest your own money in the plan.

I might invest yours.

Here's what I don't get: why does the government have to buy the mortgages? All the companies the government is looking to bail out have assets. If the boards and CEOs running the companies want to stay afloat at all, couldn't they just sell off their assets? I would guess that a lot of small- and medium-sized mortgage companies would be willing to buy them. A few people might even be willing to start up a mortgage company to buy up what would undoubtedly be some great deals. Instead, the government is buying the assets at a much higher price than they would be worth in the market. Which seems odd, except that the government is also picking and choosing who they are bailing out, and those they are bailing out all have very strong, very deep connections to certain politicians. Sounds like it's payback time for various forms of donations to certain politicians to me. I'm guessing there is a huge scandal here the media is going out of its way to ignore.

Michael Kolczynski writes:

That expected value has no basis on Bryan's bet as he merely states the bet is "fail to make a profit." He doesn't say "much of" or " hardly make" or "won't be disastrous." So if you think there's a 2/3 probability of a slight profit, take the bet. Your expected value is 1/3.

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