David Wessel, I have five words for you: post hoc, ergo propter hoc.
Mr. Wessel is the Wall Street Journal's chief economics commentator, and is often the face of the Journal on television. He wrote an article recently ('Bailouts Save Day, Win Scorn") that laments the fact that, despite the fact that the bailouts saved the world, Mr. and Mrs. America don't believe it. In fact, he points out that Americans' distrust of government and large corporations has grown as a result of the bailouts, something they see as unfair, and an example of cronyism between Wall Street and Washington.
He says in the article:
The world has had a terrifying brush with another Great Depression. Although the recent scare in Europe is a reminder that this isn't over yet, it looks like we've escaped that—in no small measure because of taxpayer-financed bailouts and fiscal stimulus, as maligned and imperfect as they were.
Mr. Wessel is a bright guy, a star of a pro-capitalism newspaper. Yet he makes serious economic and logic errors that are not based on theory or the record. He needs a lesson in economics and epistemology (the science of how we know what we know).
Post hoc, ergo propter hoc is a Latin phrase describing a logical fallacy. The fallacy is: because A occurred and then B occurred, then A caused B. In modern behavioral economics this also coincides with the principle of 'confirmation bias,' where you look for data that coincides with your desired conclusion.
There are two fallacies here.
The first fallacy is that bailouts saved the world. The second fallacy is that without the bailouts we would have had another Great Depression. As Mr. Wessel says:
It just doesn't seem fair. Because it isn't. The bailouts weren't designed to be fair. They were designed to prevent a financial virus from infecting the entire economy. And there was no quick way to keep credit flowing, so the economy kept functioning, without saving some big financial institutions and the folks who work in them.
With regard to the bailouts saving the world, I would ask him how he could prove that. I think I could easily argue that in fact the thing he feared would happen, a financial meltdown and credit freeze, did actually happen and the world didn't end. Except for the 10 largest banks which had access to the various Fed ATM machines, the economy is still suffering from the meltdown. Mr. Wessel confuses these large banks with the economy.
I could further argue that the bailouts have actually harmed the economy and have delayed recovery because some of these large financial institutions were bankrupt and should have been allowed to go under in an orderly manner. The pain would have been intense, but short. Now we are still in pain, the economy is on the verge of setback, and we have saddled future generations with the cost of paying for it.
There is no basis to say that fiscal or monetary stimulus has saved the economy. I challenge Mr. Wessel to prove this assertion as well.
Since the Fed had boasted that it could easily manage recessions by pumping money into the system, why hasn't that worked? Why are we still having a credit freeze? Why is money supply continuing to decline? Why is unemployment, especially U-6 unemployment, growing? Why are we experiencing deflation instead of inflation? Why does he assume that Keynesian fiscal stimulus has any lasting effect?
The second fallacy is that he believes we would have had another Great Depression without the bailout.
Again, what proof is the proof that that would have happened? I would say, as I have many times on The Daily Capitalist, that depressions are caused by government action. Mr. Wessel apparently believes that economies go into serious depression all on their own, which was not the case of the Great Depression. Had the government under Messrs. Hoover and Roosevelt not interfered with the corrective process of what was originally a garden variety recession, the economy would have recovered in 18 months, as did the much worse recession of 1920-1921 when the government did essentially nothing.
What really happened to us was the Great Panic of 2008. I'm not talking about the collapse of Lehman Brothers. I am talking about the panic of Hank Paulson and Ben Bernanke. They had no idea what was happening at the time and didn't know what to do. They too confused Wall Street with the economy. So they resorted to doing something, which was the bailout. History has shown that usually when the government does something in these circumstances, we all end up suffering.
Like the Great Depression, Mr. Wessel needs to understand the causes of this recession. It has more to do with the Fed and government housing policies than Wall Street. Wall Street made huge errors--mainly in assessing risk. But the cause can be found in the Halls of Power.
If the Journal wishes to be an advocate of capitalism, it needs to abandon its Keynesian myths. It seems the American people already understand this.
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