Cochrane and Rogoff on the PBS News Hour

Why not let the banks fail and eat our crap sandwich one bite at a time? Either way, taxpayers foot the bill. Cries that we have to do something big, right now, or the end will come remind me too much of timeshare/vacuum-cleaner salesman tactics.

I want to see data about the ordinary banks' exposure to the mortgage securities problem. The government's proponents of the bailout have an obligation, in my view, to come up with this data. The fact that such data hasn't been presented is a key reason why many are saying the bailout has not been justified. I realize the securities are multi-tiered (etc.) and that the data may not be susceptible to easy presentation.

If anybody knows the whereabouts of approximations of such data, I'd be grateful for a link to it.

The Federal Reserve publishes data on categories of bank assets. Total mortgages and securities are vast compared to consumer loans (like credit cards) and commercial loans.

Professor john_seater@ncsu.edu has made a similar point to the below. But I reproduce my article since I developed these ideas de novo. I am not an economist. -Ray

I have a theory about the bailout crisis: it's routine--a routine credit contraction caused by overexpansion. I would welcome a comment from the readers of this blog.

Here's how to prove this yourself: Google "The Curve in the Road by John Mauldin". Look at the two graphs for LIBOR over the last year and for commercial paper outstanding since 1990. Two things stand out: LIBOR also spiked in Dec 07 and from Mar-May 08--to 2% from 0.5%. This past 30 days it spiked from 1% to 3.5%. To me, it doesn't seem unprecedented. I've heard that in the early 1970s a similar spike occurred (can anybody confirm this?). Second, and most damaging: the reduction in commercial paper is not historically abnormal now. From 2000 to 2003, commercial paper dropped 19% (look at the graph: 1600 to 1300). From 2006 to 2008 (today's crisis) commercial paper outstanding dropped 25% (2200 to 1650). Severe yes, but, again, not totally unprecedented.

Can we therefore say that this credit crisis is a 'routine' (albeit severe) response to the credit expansion we've had over the last five years or so? If so, then why did Bernanke and Paulson panic? Could it be that as middle-aged men who have never witnessed a severe credit contraction (such as happened in the early 1970s and early 1980s), they overreacted? Of course, more cynical and sinister theories are possible, but this is the benign theory: they were simply over their heads in responding to a relatively normal credit contraction. And we taxpayers have to pay, as well as setting an extremely damaging precedent for the USA.

One final note: you can argue that "but for" the government intervention, the contraction in commercial paper would have been much more severe, which therefore justifies the intervention. But this is complete speculation. In fact, you can argue that $700 B is not enough to prevent further contraction, and therefore this argument is circular.