The news breaks and Democrats rush to fix it. “Subprime” borrowers got too much money to buy homes they can’t afford. Was that the start of the problem? What ends it? What if those who provided this kind of debt lose money? Think they do that again?

Way back when this story first broke, Hillary jumped in with a jumble of bailout and get tough. She sure is trigger-happy about providing "leadership" (which to her means she gets more power and you have less money). Barney Frank and Chris Dodd are ready to deploy those battleships Fannie and Freddie to do something, if only those ships weren’t in dry-dock for repair.

How much of this crisis even lasts until the congressional recess is over? Well, you don’t understand Washington much if you don’t recognize that a crisis doesn’t end until they have “done something.” Wanna bet that something isn’t going to be good?

President Bush wants the markets to work this all out. That’s the right instinct and it might be his Administration’s policy; the trouble is not what he says, it’s him saying it. This is a time to instill confidence and he has a hard time doing that, which is unfortunate for all of us.

Where is Paulson, btw? Standard operating procedure is that you put the Treasury Secretary out front to explain, calm and, sometimes, to defend and/or propose.

Beware the White House economic staff -- they get caught up in the tornado; moreover, they are just as vulnerable to crisis-itis as folks on the Hill.

What is “crisis-itis?” It is my own diagnosis. It is a form of dementia where the inflicted believes his or her own self worth rises as the situation he monitors worsens. In all cases, the inflicted greatly exaggerates his or her control over events, as well as the size, duration, and impact of those events. In extreme cases, the inflicted seeks to worsen the crisis to inflate his or her self esteem.

If Congress must do something, then it should pass a law requiring all crises to occur during congressional recesses.

Here come the inevitable smears from the Left for my Wall Street Journal op-ed on Friday. Leading the charge is the anonymous coward who blogs at Angry Bear under the pseudonym "PGL." His comments are long on attack -- the word "stupid" appears several times, and I'm compared to Ann Coulter. But they're short on substance. He claims I'm cherry-picking my quotations from various economists whose work supports my view, and distorting what they actually said. His proof? Extensive quotations and analysis from an economist whom I never even mentioned (actually, only from the abstract of one of his papers -- PGL probably didn't have access to the text, and wouldn't understand it if he did). So there's some quibbling about how quickly the effects I talk about would take place (I never talked about the timing one way or the other), and some quibbling about changes to taxes other than capital taxes (I never said there would be none).  But no evidence that I misrepresented my Larry Summers quote -- in fact, PGL simply repeats it. No mention whatsoever of my Treynor or Lucas quotes.

The reality is that there is a broad consensus among economists that taxation of capital is inefficient. Sure, you can find some who don't agree. But so what? As far as the center of gravity in thought among serious economists is concerned, the inefficiency of capital taxation is settled science.

PGL is way over his head on this one, and is rather amusingly making quite a fool of himself. Life lesson for PGL -- why do you think Mark Thoma suggested this particular topic to you, instead of taking it on himself?

Posted by Donald L. Luskin at 4:27 PM | link    

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