Monday, October 13, 2008

Who is a realist?

Paul Romer is one and he responds:

Realists were ones who said that given the unusual conditions that prevailed, it was too risky to let them go into bankruptcy. By these criteria, most of the people who signed the letter opposing the Paulson plan were probably fundamentalists. Remember, the realists were the ones who said that given the complexity of interconnection, a competitive market in telephony would never work. Fundamentalists were the ones who said that they didn't know precisely how, but they were sure that market competition would work just fine even there. So it is not true that everyone wants to be called a realist. Or that realists are always right or more sensible. My point was that fundamentalists should listen to realists and they should put more weight on what they say when predictions based on the fundamentalist models are turning out to be wrong.

…Personally, I switched sides when I saw how much damage the Lehman bankruptcy did and how quickly the damage was accumulating. If my prediction was so wrong, it seemed to me that the time had come to place less trust in the models and to listen more carefully to people closer to the front lines who were raising alarms. I switched to support for giving Bernanke and Paulson all the firepower they asked for because I thought the increased risk of a financial panic that we would run if we didn't far outweighed any risks from spending the resources in the wrong way or from giving Paulson too much discretion.

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