Wednesday, February 25, 2009

How do we know?

This is kind of the key question. American taxpayers have ponied up roughly a trillion dollars to rescue the financial sector of the economy. What do we have to show for it? How do we know if the rescue is working? One could easily argue that we gave away a ton of money last fall and gained nothing in return. One could also argue that the crisis would have been much, much worse had we not floated that money to the banks. How do we know which is true?

By contrast, your average voter probably can make some determination as to whether the $700 billion dollar stimulus package works. If the economy is growing again next year at a reasonable clip, it would be believable that the stimulus made a difference. Of course, we can't really know that without looking at some hardcore numbers and making some serious counterfactual assumptions, but people have a vague idea of what the stimulus is supposed to do and can compare that with reality.

The financial sector is another animal altogether. Most people (and I include myself and just about all political journalists in this group) really don't understand how this sector of the economy functions or how a bailout is supposed to help. If I have an easier time getting a loan next year, is that because the bailout was a success? Because banks are comfortable making risky loans again? Is it good or bad? I suppose with such an information asymmetry at work, people will be relying on all sorts of cues -- hearsay, ideology, etc. -- in deciding whether this trillion dollar venture was a success. Probably not the kind of accountability the founders were hoping for.

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