Economists Speak

by on September 23, 2008 at 4:42 pm in Current Affairs, Economics | Permalink

An excellent Open Letter on the Bailout signed by many economists.  Hat tip to Justin Wolfers.

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

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
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, Americas 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.

these reasons we ask Congress not to rush, to hold appropriate hearings, and 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. 

1 randy September 23, 2008 at 4:53 pm

huh? aren’t these the same guys who said a recession was unlikely just a few months ago?

2 Query September 23, 2008 at 5:01 pm

How important is psychology in all of this? How important is it to get out in front, with a big number, in order get rid of the siege mentality and get money flowing through the credit system?

3 aaron September 23, 2008 at 5:37 pm

I think this ties in directly with the Sarah Palin phenomenon.

Her lack of legislative experience is a plus. There are few people I wouldn’t vote for over a congressman. Hell, Kwame would make a better president than these assholes.

4 Josh Robyns September 23, 2008 at 5:50 pm

Wall Street shivers in the slightest passing breeze. The market is certainly upset it seems as Congress contemplates the Paulson/Bernanke plan. They may have good reason; the problem is definitely extremely serious.
On the other hand, would it not work to the market’s benefit to stir further the fires of fear and plunge even more precipitously over the next day or two to force Congress to hastily, and perhaps unwisely, approve a plan that allows too many people to get away with too much and permits Wall Street to avoid that much dreaded beast “Regulation”.

a skeptical non-economist

5 A Stoner September 23, 2008 at 6:02 pm

Things to do:
1) Repeal the 1977 Community Reinvestment Act. There are $538,000,000,000 in Sub prime mortgages outstanding today. The government encouraged these loans, and 3% of these loans default on average. The government should reimburse those with paper for these sub-prime loans to the tune of 3% charged to the tax payers.
2) Repeal Sarbanes-Oxely and reimburse companies for all the added expenses for that boondoggle.
3) Liquidate Freddy Mac and Fannie Mae over the next 4 years. There should be no GSE.
4) Let the banks fail or succeed on their own from now on.
5) Get rid of all the corrupt politicians in congress that looked the other way as this all unfolded under their sticky fingers rule.

6 Jeff Garzik September 23, 2008 at 6:16 pm

Not so excellent…

The letter does not address the consequences of doing nothing, nor suggest an alternate plan, and thus fails to add substance to the debate.

There are clear risks and hazards with the proposed bailout; even Paulson and Dr. Ben are pointing these out. But the key argument is that alternatives are worse.

These economists do us no good, by failing to cover the choice politicians and citizens must make: if we accept that Paulson’s plan is fatally flawed, are we prepared to deal with the consequences? how bad are the consequences? Are politicians at election time going to accept those consequences for Main Street?

7 Robert Olson September 23, 2008 at 6:21 pm

All gains are privatized. Income taxes, sales taxes, property taxes, and payroll taxes do not exist.


8 John Pertz September 23, 2008 at 6:28 pm

I cant say that letting the market work its magic and leaving the tax payers and the political process out of it is such a bad idea.

If there are severe long term welfare effects from taking action to prevent SEVERE short term pain, Id like to get an estimate as to how bad these long term effects could be.

I do not believe anyone knows. The supposed fire and brimstone threats of letting the market sort this thing out may not be so bad if the long term effects of intervention are even worse.

I agree with Jeff that the economists should of discussed some alternative plans because we are going to get either the Paulson plan or a modified version of it, whether we like it or not. The economists could of enlivened this debate in a much more meaningful manner by proposing something else or discussing the ramifications of letting the market play this thing out.

9 Mike D September 23, 2008 at 7:04 pm

A quick and informal glance at the specific names doesn’t show many macro or financial economists that I’d expect to see on there. Hmm.

10 Tim L. September 23, 2008 at 7:23 pm

@Mike D – I agree that it would be nice to seeing a Rogoff or Fama pop up on the list.

I counted 37 professors from the University of Chicago… So I’m gonna say its good enough for me.

11 Andrew September 24, 2008 at 3:15 am

“huh? aren’t these the same guys who said a recession was unlikely just a few months ago?”

Isn’t that just a subset of all the guys yakking about this situation who didn’t predict it, but know how to fix it?

And, we still don’t have a recession yet, but Bernanke promised to give us one if the Congressioners don’t hurry up.

12 Andrew September 24, 2008 at 3:49 am

I was pondering taking the debt and giving the creditors stock, which would give an extra incentive to keep the companies alive. We are basically in a rapid-fire group bankruptcy. I read Zingales’ article and it sounds similar in essence.

Oh, and tell Naomi we are sorry. We had no idea that people would try to use government for their own self interest.

For someone supposedly opposed to marketing, she certainly has created a strong personal brand for herself.

13 Andrew September 24, 2008 at 4:24 am

Dear Naomi,

We are sorry. We didn’t realize that banks lend money at long term and borrow short term. We had no idea asset bubbles could be fueled by margin and credit. We weren’t aware that incentives to write loans may not be incentives to write good loans. Regulations encouraging fractional reserve banking and central bank borrowing as a backstop are one thing, but, the idea that 20 or 30 to 1 leverage on short-term liabilities might be risky when asset values drop was a shocker. Sometimes, businesses go bankrupt, who knew?!? We are quite surprised that the people who caused this mess want to control the debate process for the resolution. But, we trust that their predictions of doom and gloom if we don’t act right the #$&@! now are well-reasoned and have all of our best interests at heart. And, the politicians, who obviously care deeply about us, will be right, no matter what they decide before they have to get home to campaign.

Hugs and kisses,
Market Fundamentalist

P.S. what’s your next book about? Say hi to Noam for us. See you at the G8 after-party.

14 Billy September 24, 2008 at 3:18 pm

“The letter does not address the consequences of doing nothing, nor suggest an alternate plan, and thus fails to add substance to the debate.”

As George Costanza once said, “everybody’s doing something. We’ll do nothing!”

15 ogmb September 26, 2008 at 6:11 pm

“Most of all, caveat emptor — these are a matters for buyers and sellers, not regulators. Nobody else gets hurt if you buy a lousy mortgage pool. The government does not need to write a new rule every time someone buys a rotten tomato. Investors will demand the right transparency, complexity, and risk-sharing or monitoring of mortgage pools. That is, unless they get bailed out and learn to count on that instead! The history of the mortgage market is a grand story of bringing credit to people who need it, upon the removal of layer after layer well-intended but counterproductive “protective” regulation. The history of the mortgage market is a grand story of bringing credit to people who need it, upon the removal of layer after layer well-intended but counterproductive “protective† regulation.” — John Cochrane, Chicago GSB, 2007.

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