Tuesday, March 24, 2009

Mikey Likes It!

The markets liked the Treasury plan. As Jonathan Chait reminds us, this doesn't necessarily mean much; the anxious fretting over market reactions to policy announcements reminds me of this:

However, Free Exchange argues there is a placebo effect:
It isn't clear to me why markets are up some 6% today. Or rather, it's clear to me that they're up because of the Treasury plan, but it's not clear why they're up because of the Treasury plan. It's also not clear to me that it matters. Tonight, every newscaster in America will say, more or less, the following words: markets were up strongly today on expectations that the Treasury's banking plan will succeed. Who cares what Mr Geithner was saying on CNBC this afternoon when the Dow added 500 points on the news?

If people become convinced that a plan will work, they'll begin to make bets based on expectations that the plan will work, which will make the plan work regardless of what the plan is. I don't know whether the rally will stick or not, and the broader economy will follow its slow path toward eventual recovery in any case, but this certainly has the potential to change the psychological dynamic that had prevailed, of lost confidence in Mr Geithner and in the banking system. And that would have to be considered a big win for the Obama administration.

Or, we might say there are multiple equilibria, and the new "confidence" shifts us to a better one.

Still, I am more concerned with Paul Krugman's reaction, and he doesn't like it. But Brad DeLong is more hopeful, as is Steven Pearlstein.

Secretary Geithner explained the plan in the WSJ, and there is more at the Treasury's web site.

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