Thursday, September 25, 2008

Do we know too much? Or not enough?

I was musing last night about whether Bernanke and Paulson weren't caught off gaurd -- as so many of us assume -- but, due to improvements in information systems, are able to know things much more quickly than was true in the past. During earlier pre-recessionary periods were their predecessors even in a position to determine that a massive remedy might help avoid the costly calamity of a recession? After all, what they are arguing is that they've identified a tradeoff: spend $700,000,000,000 (much of which might be recovered) in exchange for lowering the chance of a recession.

This morning I was scanning my usual repast from my favorite blogs and was pointed to the new economics blog at the New York Times, Economix. (Thanks, Tyler Cowen.)

Scrolling the posts I found this post: Too Little Information, Then Too Much
[The NBER] has just put out a new paper called “The Panic of 2007,” by Gary B. Gorton of Yale, that tries to explain how we ended up in this financial mess. His basic theory: the mortgage-related securities that began to go bad last year were too complex, and shrouded, for many investors to understand; but the explosion of available information about Wall Street — like new indexes tracking the securities — allowed investors to learn very quickly that something was going wrong. That’s the recipe for a panic.
It's not what I was musing about, but it's related.

While we're on the subject of Bernanke and Paulson, I wanted to balance off some of my recent posts pointing to skepticism amongst economists about the $700 billion plan with some support for it here and here.


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