Are Paulson-Bernanke Overhyping the Danger?

There are differing opinions to the amount of risk involved.

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Based on the doom-and-gloom scenario that Paulson and Bernanke peddled to Congress, the bailout plan seemed worth the cost to me. (And I note that credit markets are today as bad as they have been since this crisis started.) But some Wall Street economists don't seem nearly as negative as our guys in Washington. Here is what the folks at Global Insight were saying on September 15:

The economy is very weak, the recession wolves are pounding down the door and the financial system faces new deflationary threats from the bankruptcy of Lehman Brothers. This is an emergency situation and an aggressive response from the Fed is needed. Without such a response, pressure on Congress to take further action to stem the crisis would be unstoppable.

But the firm just released an economic forecast that assumes Congress does nothing:

Although the U.S. financial crisis is bringing sweeping changes to Wall Street, parallels to the Great Depression are overblown. The U.S. economy is far more resilient today, thanks to income support policies, federal deposit insurance to prevent banking panics, and flexible exchange rates. From 1929 to 1933, real GDP contracted 27%, prices fell 25%, and the unemployment rate climbed from 3% to about 25%. Even in our pessimistic alternative forecast, the peak-to-trough decline in real GDP is just 1.5% and the unemployment rate peaks below 7.5%.

Me: I'm sorry. Spending $700 billion (which is really $2.5 trillion since you are borrowing the money) to stop a recession—no worse that what we saw in 1990-91 (one quarter of -3 percent growth and one quarter of -2 percent growth) or even 2001 (one quarter of -1.4 percent growth)—seems nutsy. If they want to get this thing passed, Paulson and Bernanke better be more explicit about the risks.