Paul Samuelson, pessimist

by on November 19, 2007 at 3:26 pm in Economics | Permalink

Today, Federal Reserve Chairman Ben Bernanke admits that nobody, including
him, is able to guess how near to bankruptcy the biggest banks in New York,
London, Frankfort and Tokyo might be as a result of the real estate crisis.

Taken literally, Samuelson is correct.  No one can say how near to bankruptcy those banks are but that is because they are not very near to bankruptcy.  Subprime crisis or not, most people are still paying off their mortgages quite comfortably.  Many bank share prices are down but the major banks are not hovering close to p = 0.

I’m not sure what Samuelson counts as "today," but using Google News I cannot find any such statement by Bernanke and if it had been made it would be a) grossly irresponsible, b) headlines, and c) the market would have plunged dramatically.  The most likely possibility is that this passage is a simple untruth, not representing what Bernanke said.

Samuelson draws an analogy between today’s subprime crisis and Herbert Hoover claiming the Great Depression would end soon.  It’s worth noting that Hoover faced high unemployment, radical deflation, incompetent monetary policy, bank runs, and a lack of automatic stabilizers, none of which are the case today.

It is amazing how pessimism and the desire to blame will cloud men’s minds. 

It can be said, however, that if further bad things were to happen, "the crisis so far" would mean we have much less room to maneuver.  So I’m not telling you that everything is fine, I am simply putting this piece in perspective.

Here is the link and much more.

1 chris November 19, 2007 at 3:48 pm

“No one can say how near to bankruptcy those banks are but that is because they are not very near to bankruptcy.”


2 bob mcmanus November 19, 2007 at 4:05 pm

Shhh!! Back when we had recessions every couple years, this was called “talking the economy down.” Economists, business leaders, politicians etc telling us all to be optimistic & postive is a very strong leading indicator. “The fundamentals are strong.” Really & truly.

3 Bob Dobalina November 19, 2007 at 4:12 pm

That read like a Tabarrok piece!

4 B.H. November 19, 2007 at 5:37 pm

No sense in being pessimistic. It wouldn’t work anyway.

5 glenn November 20, 2007 at 1:35 am

I’d be very worried. Citigroup and a couple others are likely going to need more
capital; they’ll take further write-offs in q4. Floccina – you’re in the eye of the
hurricane: all is not well with C and NCC. C’s dividend is not safe at all.

You can quite easily imagine a situation where the US gov’t will step in and shore
up several banks. Problems with a bank the size of C might be enough to seize up
the system for awhile.

6 Dwight Schrute November 20, 2007 at 6:07 pm

Samuelson gets my nomination for Empty Statement of the Year with this line:

“The best policy is actually the middle way: not too much freedom for market forces, and definitely not too little freedom.”

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