Magical thinking: In anthropology, psychology, and cognitive science, magical thinking is nonscientific causal reasoning that often includes such ideas as the ability of the mind to affect the physical world, correlation equaling causation, the law of contagion, the power of symbols, and the meaningfulness of synchronicity.
Magical thinking can occur when one simply does not understand possible causes, as illustrated by Sir Arthur C. Clarke's suggestion that "any sufficiently advanced technology is indistinguishable from magic" (see Clarke's three laws), but can also occur in response to situations that are largely random or chaotic, such as a coin toss, as well as in situations that one has little or no control over, especially those one is emotionally invested in.
Since it appears that the Paulson Bailout will soon be back from the dead, I want to reiterate what I and others have said about why this particular bailout proposal is a bad idea. We are at a pivotal time for the credit markets, and something needs to be done to create stability. However, this plan will not fix the problem. There are several reasons:
- No controls on how the money is distributed: This plan will give Paulson unlimited power to distribute $700 billion how he sees fit. There is nothing Paulson or Bush has said or done in the last 8 years that demonstrates an ability to comprehend problems of this magnitude, let alone an ability to deal with them properly. This plan allows Paulson to arbitrarily pick winners and losers in the marketplace, thus determining which firms go bankrupt, and which ones survive. That is too much power for one man to have, even the President.
- No proof that credit will unfreeze: The plan is to buy illiquid securities at above mark-to-market prices. That will somehow unfreeze credit. The somehow is a missing link. How exactly will this happen?
- No clear method of valuation: The Treasury will use as-of-yet undisclosed methods to value the securities they choose to purchase. Since the normal arbiter of prices is the market, we need another transparent pricing mechanism so we know we're paying a good price. (I've suggested a "mark-to-cashflow" method. Are there any others?)
- Doesn't attack the real problem: The real problem is lack of trust. We have a situation where every company and government official has lied to each other and the American People for so long about the depths of this problem, that we've reached a point where markets cannot function. I'm willing to wager that several CEOs and bank presidents have been knowingly hiding losses, which would make them criminally responsible. The lack of regulations and the unwillingness to enforce existing ones is also to blame. This plan does nothing toward restoring that trust. If anything, it adds another layer of obfuscation and corruption to the system.
I will say this unequivocally: Without a joint effort involving both parties in both houses in an open forum, we have no hope of solving this crisis. There is no amount of money we can give Paulson that will help. Anything else is just magical thinking.