Paulson and the rhetoric of fear
10:50 am - September 25th 2008
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Henry Paulson said Tuesday:
The market turmoil we are experiencing today poses great risk to US taxpayers. When the financial system doesn’t work as it should, Americans’ personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened.
How true is this? There is some empirical evidence here – the last 12 months. And this seems to undermine the more alarmist senses of Paulson’s claim.
The Fed’s flow of funds data (table 1 of this pdf) show that between Q2 2007 and Q3 2008, net borrowing by the non-financial sector fell by more than half – the biggest annual fall for 50 years. Borrowing by households fell from an annualized $950bn to $197.3bn. Borrowing by non-financial companies fell from $846.5bn to $390.3bn.
The financial system, then, hasn’t been working as it should.
And yet the economy hasn’t collapsed. Real GDP grew 2.2% – low enough to raise unemployment a little but not a catastrophe.
Of course, you could argue that there are lags between collapsing lending and the economy; it‘s quite likely GDP will shrink in Q3 or Q4. But – for what it’s worth – most forecasters, at least before the latest turmoil, were expecting an upswing during 2009.
Now, I’m not coming over all John McCain here. I’m just pointing out that there’s a distinction between a dramatic meltdown in the financial system on the one hand and much less dramatic events in the overall “real” economy on the other. The classical dichotomy has been especially sharp recently.
One reason for this is that the real economy has had other supports: the weakish dollar, looser fiscal policy, reasonable profitability, demand from the Brics and (which is not to be under-estimated) force of habit. All but one and a bit of these is still with us.
Which raises the question. Might Paulson be pulling a rhetorical trick here? It’s hard to sell his plan on the basis of efficiency, necessity or justice. So he’s appealing to fear instead.
This post originally appeared at Stumbling and Mumbling
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Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
· Other posts by Chris Dillow
Story Filed Under: Blog ,Economy ,United States
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Reader comments
Appealing to fear?
Well that would certainly be the Bush administration’s way. I was awake last night at 2am watching Bush’s statement to the American people.
It was his usual trick, trying to strong-arm the Congress into making a hasty decision without adequate debate or allowing oversight. “No time”, he cried, as his tiny, beady little eyes narrowed even further.
Paulson has been just bad. For almost a week he’s been trying to scare the politicians into accepting his plan – a plan that does a great job in propping up a failed system, but does little to help the home-owners who have been carved up and sold down the river by this crisis.
Perhaps they know something we don’t… 
In any case, Paulson can’t get away with this:
” Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
Chuck.
I heard that quote on MSNBC, yesterday, and couldn’t believe my ears.
I’d have more faith that the Treasury secretary was being fair and acting in the public interest when he decides to help his chums at Goldman Sachs if the processes were transparent and accountable.
It is in situations exactly like these that unelected appointments to political office cannot be relied upon as the best method to decide the people who formulate policy (leaving aside for a moment the question of whether these powers should be concentrated in the hands of a single person).
This is a huge weakness of the Presidential system, so whether or not the ‘expert’ analysis is correct there is no means to ensure its reliability. And since market stability is based on reliability whatever Paulson says cannot rebuild confidence, it will only postpone the inevitable by forestalling the reform of the institution and/or constitution (though this could mean greater democratisation or not – my money would be on not).
Is this market failure accidental or deliberate? It doesn’t really matter, but it was certainly logical once the interests of government, military and corporations progressively began to be bundled together from 9/11 onwards – what matters is what we can do about it.
192 economists oppose the Paulson plan.
Ben
The greatest risk to US tax payers is getting ripped off with yet more corporate welfare. All that will do is increase the expectation of yet more bail outs in future. The banks took the risks so they must now face the consequences. A few traders looking for different employment would not be a bad thing pour encouge les autre.
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