More on Fear.

Many commentators responded to my earlier post along the following lines (this passage is from timd):

Bush, Paulson, Bernanke, Pelosi, Obama, McCain - None of them have presented the facts in a way that makes it clear (a) which current symptoms are indicating the potential for a meltdown, (b) what a meltdown would look like exactly, (c) why the government's actions would make a meltdown less likely, and (d) why the unintended negative consequences of government action are unlikely to outweigh the positives.

But can the administration realistically satisfy the demand for specificity and evidence -- with respect to both the claim that a crisis exists and that a particular plan will succeed? Think back to the summer of 2001, when the government had reason to think that a major attack would occur in the near future (I borrow this example from Commenter commontheme). What could the government have said that would have persuaded you to agree to a costly or otherwise troubling policy that could be justified only on the basis of a serious threat (immigration restrictions, for example, or the use of military force in Afghanistan)? "We've heard a lot of 'chatter' that might or might not mean that an attack is imminent," the honest government would say. "We can't reveal it to you without compromising our intelligence methods, however, and anyway it's in Arabic and it would be difficult to explain how we verify the information." And: "we can only say that the policy we advocate might reduce the risk of an attack but we can't guarantee it." Satisfied?

The current case is similar. The TED spread is at a historic high but few people know what that means (it's a measure of how scared banks are, based on the interest rates they demand when loaning to each other), nor is it clear how high is too high. Various enormous financial institutions in the United States and around the world have failed but it is not clear that more would or that their failure would result in a contagion effect that caused serious long-term harm to the economy. The Fed no doubt has data and models but probably can't reveal them without spooking the markets further and revealing proprietary information, and in any event would have no ability to explain the data and models to your satisfaction. No one knows what will happen if no bailout occurs—could be Great Depression #2 or a mild recession. And no one knows what will happen if a bailout occurs. In this way, the bailout bill is just like Richard Clarke's proposal to send cruise missiles to blow up Osama bin Laden before 9/11—except that today we have better data, a consensus among political leaders, and more-or-less agreement among experts (those economists who signed that letter seem to be less and less vocal with each passing day; in any event, they did not so much oppose a bailout as oppose the Paulson bill and advocate greater deliberation before legislative action).

I ought to point out that, in any event, the Fed and Treasury have already made plans to go ahead and lend all the money that you thought Congress had voted down. They are doing so because Congress gave them the authority to do this in statutes enacted long ago, and charged them with the responsibility of resolving financial crises, which is exactly what they are trying to do. It is odd that the critics of the bill are not trying very hard to persuade the Fed to back off. What the Fed and Treasury want from the bailout bill but are not getting (so far) is additional political backing to help restore confidence in the financial markets. One might think that if all this money is going to be spent anyway, the case for the bill, which provides for additional tools and oversight, is rather strong.