Economists Speak

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
plan:

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, 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.

For
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.