Knowing and Making

Via Stephanie Flanders, the IMF starts to give us a way to estimate the return on investment of recent financial bailouts from various countries. Apart from anything else, this may help to silence some of the complaints from people offended at us "giving" money to banks to "bail them out". There are two different ways to calculate ROI: first, what is the cost and benefit to the state as an entity, and second, what is the cost and benefit to the economy as a whole. Note that the 'cost' here does not refer to the entire cost of the crisis in lost economic output or reduced asset prices - because most of that is a sunk cost and our decisions can have no impact on it. It refers to costs specifically incurred by explicit decisions taken to rescue financial institutions. In the case of the UK, the cost to the state (according to the IMF) of the bailouts is about 9% of GDP or £130 billion. The return will include: Whatever is gained from selling off government sta...

A story of how the bank bailout money is providing an indirect stimulus to the economy. Or would do, except that political pressure is stopping the bank from spending it! I think Greg Mankiw posted a similar question last week: Scenario 1 : A bank receives $20,000 of bailout money and hires Joe the Plumber to refurbish its bathroom. Scenario 2 : A bank receives $20,000 of bailout money and lends it to Ted the Lawyer, who hires Joe the Plumber to refurbish his bathroom. Which has the greater macroeconomic effect? At the time I thought Mankiw was implying they were equivalent, but it felt like a trick question. I guess the answer might  be that $20,000 of bailout, by increasing bank capital, actually enables (say) $100,000 or more of new lending. In which case Scenario 2 is preferable. However, I have to ask: is Bank of America supposed to suspend all marketing activities during the course of the recession? Surely their marketing people have done some kind of analysis and decided this i...

More on bailouts: Paul Greenberg in the New York Times says we should bail out writers. Of course, he doesn't analyse the economics properly - but what should we expect - he's a writer. No doubt it would be useful to reduce the oversupply in the writing market; but should we also then be paying bloggers not to post? Is this how farm subsidies got started? And Richard Posner follows up an earlier article about the US automotive bailout arguing that the three big US car companies are fundamentally insolvent but it is better to support them another couple of years and then  let them go bust. I sympathised initially with this view but the comments on that posting - mostly taking the opposing view - are actually quite persuasive. If the companies are going to go bust anyway, maybe now is the time to get the bad news out of the way; rather than wait till a fragile confidence is taking hold and then shatter it again. Posner's argument is (I think rightly) psychological; but so i...