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Eat your chicken ... or else

Dean Baker critiques the Zandi/Blinder study from the left. "While the analysis of the stimulus is pretty standard and very much in keeping with other estimates," he writes, "this is not the case with the analysis of the financial sector policies."

The problem with the study is the implicit counterfactual. It effectively assumes that if we did not do the TARP and related policies, that we would have done nothing even as the financial sector melted down.

This is comparable to doing an analysis of the benefits of eating chicken where the counterfactual is that people eat nothing. Needless to say, we would find very large benefits to eating chicken in such a study.

Suppose as an alternative counterfactual, we let the market do its work. Citigroup, Goldman Sachs, Bank of America, Morgan Stanley would be out of business, with their highly paid CEOs walking the unemployment lines. Rather than doing nothing, we could have the Fed flooding the system with liquidity (much as it did), without having to worry about money being siphoned off by bonuses for the honchos who led these banks to ruin.

By By Ezra Klein  |  July 30, 2010; 9:02 AM ET
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And, the CEO's could have been eaten by sharks. With lasers.

Posted by: JkR- | July 30, 2010 8:56 AM | Report abuse

Instead all we got were mutated ill tempered sea bass. Really, what do we pay these people for?

Posted by: _SP_ | July 30, 2010 9:25 AM | Report abuse

Such false dichotomy is common... as anyone with kids knows: "Either you let me attend the Drowning Pool concert or I'll be miserable for the rest of my life. I know you don't want me to be miserable for the rest of my life, so I know you'll let me go to the concert."

Of course, the disjunctive premises are not, in fact, jointly exhaustive. Good pickup on the fallacy!

Posted by: rmgregory | July 30, 2010 9:28 AM | Report abuse

When all these giant banks went under, who would be distributing all the liquidity the fed was offering? Helicopters dropping bags of cash?

The "CEOs took a ton of the money" line is nonsense, and the author should know it. The amount of money they received, while a lot in the real world, is nothing compared to the money in the financial markets.

Posted by: mschol17 | July 30, 2010 9:34 AM | Report abuse

Bond issuance really isn't that hard, there were solvent i-Banks and the Fed could have bought the corporate paper. We just needed to handle the counterparty risk in an organized way... the forced buyout approach seems to have created even bigger banks. Not good. I imagined that BoA would eventually spin off the Merrill Lynch business, for example, hopefully driven by a clearer Glass-Steagal type act that made it clear what sort of banks the taxpayer will insure against failure.

Fortunately I've been using TD Bank since they bought out Commerce. Canadian safety...unless you want a knee.

Posted by: staticvars | July 30, 2010 10:01 AM | Report abuse

mschol17 is right. I'm no fan of the big banks, but they are the heart of the economy; they are the mechanism that pumps blood (money in this case) through the body of the American economy.

Sure, the Fed can make all the blood that is needed, but can it deliver it without the assistance of the big banks? Not so much. That is why the banks were considered "too big to fail."

Now it is entirely likely that had McCain won the course of action may have been along the lines of, "Let's give Paris Hilton a tax cut," but that really is the equivalent of doing nothing. Which brings us back to this study.

Posted by: nisleib | July 30, 2010 10:08 AM | Report abuse

Reason #1,222 why I love Dean Baker! It is crystal clear that Obama's economic and political advisors have to go, and has been clear since day one!

Posted by: nancycadet | July 30, 2010 10:09 AM | Report abuse

The importance of counterfactuals?

Letting markets work?

I guess the right and left can agree on more than we sometimes think...

Posted by: justin84 | July 30, 2010 10:15 AM | Report abuse

Baker's Beat the Press blog is an essential thing. Ezra should link to him as regularly as he shows a Tom Toles

Posted by: bdballard | July 30, 2010 10:19 AM | Report abuse

mschol17 has it exactly right.

That's like saying it would be ok to let all utilities go under so long as the government "flooded the nation with energy."

Remarkably ignorant.

Posted by: Craig643 | July 30, 2010 11:38 AM | Report abuse

@rmgregory: More sanity, are you coming over to the light side of the force?

Posted by: srw3 | July 30, 2010 12:21 PM | Report abuse

Though not an expert in this subject, it seems to me from what I've read that the single biggest problem with the bailouts was that there wasn't a re-lending requirement attached. If banks weren't allowed to just sit on the money we might well be experiencing a much better recovery.

Posted by: MosBen | July 30, 2010 12:37 PM | Report abuse

It's even worse than some other commenters have said: not only would the capacity to distribute money be diminished, by allowing banks to go under, there would likely have been further banks taken under, taking further banks under. When the whole banking system is insolvent, you have zero banking capacity.

Now, a state bank may be a good thing, but the Fed (nor Congress) could not create a whole new banking system in the blink of an eye. Pretty much the only alternative would have been nationalise any bank that looked rocky, then try to work out how to supervise, while leaving it to carry on as normal in the meantime.

Posted by: albamus | July 30, 2010 2:51 PM | Report abuse

"This is comparable to doing an analysis of the benefits of eating chicken where the counterfactual is that people eat nothing. Needless to say, we would find very large benefits to eating chicken in such a study."

I was just thinking this exact same thing in regard to nutrition.

For example, studies that show benefits of eating more dairy, like higher calcium. But this is compared to a typical diet with less dairy (and so more other junk). But compared to getting your calcium from plant sources, getting calcium from dairy, with its saturated fat and toxins concentrated by an animal is much worse.

Richard H. Serlin

Posted by: Richard722 | July 30, 2010 10:04 PM | Report abuse

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