As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:I think that really sums up most of my concerns about this bailout. It could be said in much more politically evocative terms (as I believe several Congress members have already done), but generally, this is a good summary of all the questions I have regarding the government bailout of the financial industry.
1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries “systemic risk.” The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America’s dynamic and innovative private-capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
For these reasons, we ask Congress not to rush, to hold appropriate hearings, to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.
[via NYT Freakonomics]
[full letter and signatories available here]
Posts
That letter has certainly gained a lot of publicity. However, most of the "leading economists" listed on the petition are not what I would consider "leading." Have you heard of many of them?
ReplyDeleteIt is certainly true that few economists support the substance of the now-passed bailout. However, a general consensus among actual leading economists was that the bailout should pass, despite its obvious flaws. Economists in this category - what Krugman has called the hold your nose caucus, included Calomiris, Krugman, Stiglitz, Roubini, Frankel, Rodrik, Eichengreen, R. Samuelson, and several of the signatories of your letter, including one of the main authors (Kashyap). Of course, the point is moot now since the bailout passed last week.
What most economists would rather have seen - and some would still like to see - is an equity injection in the form of preferred stock. This would have kept the risk where it belongs - in the private sector - while recapitalizing markets.
In the end, the bill was necessary to stave off panic. It was not meant to be an actual solution to the problem. It represented American politics: what started as a concise, 3-page plan turned into a 450+ page mass of political pork.
Whatever the problems of the bailout, it is important that we don't dichotomize the debate into a socialism vs. laissez-faire dichotomy. There is a lot of middle ground.
RD,
ReplyDeleteyou're right that since the bailout bill's fluffed-up version has already passed, this issue is a moot point. however, from the link you provided, it seems like the "leading economists" group also had the same problems with the bill. of course, like you point out, they were of the opinion that we should just pass the bill to reduce some of the panic.
by the way, it seems that paulson is forcing banks that we help to basically sell preferred shares to the government. so maybe economists are happier now than they expected to be...