My Colleague Casey Mulligan in The Times: There Is No Reason to Panic

I love the Op-Ed piece by my colleague Casey Mulligan in today’s New York Times. He very clearly lays out economic arguments as to why things are just not that bad.

He concludes as follows:

So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent.



I have to disagree with this article. I'm set to graduate college this semester with a degree in construction management. And needless to say no general contractors are recruiting and alot of GC's in the DC metro area are laying people off (and I'm talking about commercial and industrial construction not housing... obviously). This wouldn't be a shock to me except for the fact that my whole life it was preached to me that DC is a recession proof market.

Seeing as how construction is generally used as a barometer for the economy, I see this trend as being good insight into our current economic situation.


Why do financial institutions need to be bailed-out every so often? Why can't we let them fail?


Now remind me, how long after the 1929 crash did it take for unemployment to reach 20-25%?

The Great Depression generation was just a bystander at this point. Things didn't hit rock bottom until 1933.

I'd say spend that $700 billion if there's a chance we could hit 1933 again. Optimism is great, unless you don't take the means to protect yourself from possible harm.


The valid point of this article I think is that if we prevent this crisis from spreading, the economy will bounce back pretty quickly. There's still the looming threat that the financial crisis will spread, in which case the "fundamentals" will no longer be sound, and depression will ensue.


I thought that the column by Mulligan was surprisingly bad, because it does not recognize the role banks play in (1) expanding the money supply through fractional reserves (the money multiplier), or in (2) providing short term credits for all kinds of basic business operations, like payroll and 30 to 90 day payable accounts on goods or services delivered. A modern economy needs credit to live, not just for high-finance. Let a large number of banks fail and see what happens to ordinary non-financial businesses. It won't be pretty.


Doesn't that mean unemployment is going to shoot up. And the people who will be unemployed were also big spenders, which means a lot to service and manufacturing employees.


What I don't get about your and your u/chi colleagues views is this:

millions of Americans have already lost a trillion dollars in stock value, so trust me as a retailer, even the rich have cut back on their purchases

so of course we have an economic crisis

not only a buyers' strike on wall street, making everyone worth less money

but also a buyers' strike on main street, which will cost jobs as people feel and actually are poorer

no confidence in banks, NYSE quickly spreads to less confidence and actual financial ability for consumers to keep the economy moving

isn't that part of what's happened in Japan since their economy collapsed?


Tom Bozo

Well, see, I work at a chain-owned, big city daily newspaper. And I'm not supposed to worry?

Scott W

Regarding bail-outs, why not let the bankruptcy laws work instead? It means that those who *should* bear the risk of bad decisions (executives and shareholders) bear the consequences. Bankruptcy just means some new owners at a discounted (read: popped bubble) price. I thought this was the kind of situation those laws were meant for (please correct/inform me otherwise).


Not everyone is so impressed:

Clayton Ashley

But isn't the argument that if credit continues to dry up, big companies that employ lots of people will be unable to buy supplies, pay employees, and ultimately have to lay people off? I'm no economist so I may be understanding the problem wrong, but isn't it a very real possibility that this credit problem will affect almost all parts of the economy? And also, aren't people loosing a lot of their 401Ks?


This article is somewhat dangerous, even irresponsible, if only because Mulligan does not mention once the critically injured private credit markets.

Per his conclusion, we are not spending the money to bring the unemployment rate down. We are spending the money to insure against the possibility that it goes to 20%.

At the Across the Curve blog it is mentioned how top-credit organizations such as GE and IBM are paying 350+ bps above Treasuries to receive funding. Business can only continue to operate for so long with those costs; if the situation does not soon ameliorate, companies like GE and IBM will slow their projects and investments, and thusly cause major declines in output and mass layoffs.

Also, the same view of the credit markets reveals that the non-financial economy will have great difficulty without the bridges to capital provided by the financial sector. Yes, IBM might find a clever way of funding, but not without enormous private cost.

Moreover Mulligan has misled us by providing statistics, such as marginal product of capital and aggregate unemployment, that are inherently backward-looking. Twelve months forward his argument would look outrageous if, ceteris paribus Hank Paulson, they were supported with the same data.

Oh, and before Freakonomics and investment banking there was something called the Chicago-school of economics: MV=PQ. If Milton Friedman were with us still he would have noticed the M1 August 2008 decline was one of the worst on record. We don't have good measures of velocity but surely it is also declining in the face of this uncertainty. In this regard he would say, the data show a massive decrease in the money supply, and we need intervention to stop a Depression.

I am truly irate. Casey Mulligan is so confident that IBM will start a bank tomorrow, meanwhile he fails to remember the lessons Friedman and Schwartz so pain-stakingly wove together for posterity.



We should also incentive-ize consumers not to take on too much debt.

Instead of giving a tax break for the interest paid on a mortgage, instead give a greater deduction (Even up to 100%) for the principal paid. This would help do away with interest only loans and give a big incentive for homeowners to be true owners not interest payers.

Just a thought from a guy who is trying to pay off my home just a quickly as possible!


If there's no reason to panic, then why are people panicking? Mulligan seems to assume that the coldly-rational, fearless, mathematically-precise and impossible-to-fool homo economimus exists -- but in reality there is no such creature. People are, instead, plain old homo sapiens; they behave as homo sapiens does, which means they sometimes leap to conclusions, act on ill-founded fears, etc.

Also, Mulligan says: "Although banks perform an essential economic function -- bringing together investors and savers -- they are not the only institutions that can do this. Pension funds, university endowments, venture capitalists and corporations all bring money to new investment projects without banks playing any essential role." While this is true -- banks are definitely not the only lending institutions out there -- their curtailed action in the credit market means that the credit supply is reduced (even if it's not entirely cut off). I'm surprised Mulligan does not acknowledge this as a problem ... because it means that the cost of credit will go up (the law of supply & demand), and it also means it will take longer to get (since it can be had from fewer vendors). This added difficulty means that some businesses will NOT be able to get ANY credit, because they either cannot afford it or cannot wait for it. For them, the reduction in credit is inseparable from an elimination of credit.

Granted, not all businesses will be so affected. I expect only a minority -- a small one at that -- fall into this category. Nevertheless, they exist, and for them the problem is real; also, they can be found in all sectors of the economy. To paper this "crisis" over as being just something for the financial sector to worry about, is not entirely right -- even if I agree that it's not as severe as the mass media and many in government and banking are making it seem.


Jignesh Shah

In the past government used to try to keep umemployment at 6% to keep inflation low and believed that if unemployment decrease below 6% the country will face inflation risk.

Considering that financial firms need to be bailed-out every so often it might make sense for the government to require financial firms to buy a bail-out insurance. The premium collected from this insurance can then be used to finance a portion of the bail-out. This might also create a makret-based solution wherein the increase in insurance premium acts as a regulator for firms engaged in risky products.

steve pesce

The truth is that Congress passed the bailout and all the other smaller bailouts, if you can use the word smaller about 85 billion and the like, without even ONE SINGLE PUBLIC HEARING. That's taxation without representation. Everyone knows that people were overwhelmingly against the bailout. And now it's clear the ephemeral nature of Wall Street's ups and downs. So why are we the taxpayers still having to line the pockets of the wall streeters who robbed us already? Nader is the only candidate who was against the bailout and for strong regulation. Nader said if they need a bailout, let them pay for it. He proposed putting a tax on each transaction on Wall Street. This would raise $500 Billion per year and cost the taxpayers nothing.


I suppose if you are a tenured academic with little contact to the real world then things are just humming along.

Where to start?: First, as Krugman pointed out U6 unemployment is at 11%, back to 1994 levels. If you're black, even nominal unemployment is 18%, but that's just numbers, right?

Second, as Richard Branson revealed today Virgin Airlines could have gone out of business simply because a European bank refused to transfer VA's own deposits out, until the bank was rescued. The credit crunch seems to be severe outside the university credit union.

Third, we have a spike of baby boomers retiring and their pensions have been decimated, and some risk losing their homes. I suppose that is just Strumpeter's 'creative destruction', not real people's lives being decimated.

Yup, i can see your point. No biggie.



Picnic or panic; I think people just get confused about which is appropriate, and off we go.

David Heigham

As Warren Buffet put it "...get fearful when other people get greedy and get greedy when othr people get fearful."

Now that the banks are being recapitalised and other people are still fearful, this is the week of all weeks to buy in the market. And Casey Mulligan tries to spoil it all for us greedy folks by telling people to be less fearful!


@#21 Dennis

Your math is way off; you can't simply divide the total return by the number of years to get an annualized return.

The correct way to figure out the annualized return is 10.33 = (1 + X)^38, where 10.33 is approximately the return since 1970 (that's 1033%) and X is the annualized return.

This yields a much more realistic estimate of 6.34% per year.