How can we test whether the bailouts are needed? What is a scientific way of testing the validity of any decision?
Say you have two conflicting hypotheses, H1 or H2. Statistics says you have to design a critical region, such that the probability of getting there under only one of the hypothesis, say H1, is small. If we still get there, we reject H1.
How do we apply this to the bailouts? If we ignore all hysterical statements, I am aware of only one quantitative prediction that proponents of bailouts put forward with the first bailout in October 1 2008: they said that if we didn’t pass the bailout, the Dow would plunge a few thousands points.
Rep. Brad Sherman on the first bailout bill: “Many of us were told in private conversations that if we voted against this bill… that the sky would fall, the market would drop 2000-3000 points the first day, another couple thousand the second day, and a few members were even told that there would be martial law in America if we voted no.”
Well, since the first bailout passed, we are down a few thousands points. The Dow was then between 10,500 and 11,500. Today it closed at 7,115. Which proves that the whole bailout idea was wrong.
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