Luigi Zingales: Why Paulson Is Wrong

Last week, my colleagues Doug Diamond and Anil Kashyap guest-blogged on the financial crisis.

The response to their piece was amazing. At one point, their blog post was the second-most-emailed article of the day for the entire New York Times, even though it wasn’t even in the printed version of the paper — just on our blog.

I can’t remember ever seeing a blog post make the most-emailed list.

After that kind of reaction, how could I pass up the opportunity to publicize the ideas of Luigi Zingales, another one of my colleagues, whose provocative piece is entitled “Why Paulson Is Wrong.”

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  1. alex says:

    contact your senators and congressman/women in Washington.

    Tell them what you think of the Paulson “plan.” If you like the Zingales plan, tell them to read it.

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  2. kevin says:

    The last paragraph is great. “Do we want to live in a system where profits are private, but losses are socialized?”

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  3. umbrelladoc says:

    I’m jusr a simple city doctor, so I’m going to ask a stupid question. The subprime market is estimated at 2 trillion. The default rate is about 15%. That’s about 300 billion dollars. What would happen if the government bailed out the the ordinary folks with the mortgages? Wouldn’t that improve the value of the mortgage backed securities and solve the credit crisis in the other direction. Trickle up if you will? It seems to be a whole lot cheaper, and the government would wind up with real estate instead of dubious paper. And working folks who got suckered into these subprime loans would benefit instead of these corporate fat cats. Hey, I expect to be completely wrong on this one, but I’m just asking…..

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  4. jonathan says:

    You can’t cram down debt as you did in the 1930′s when the world was so radically different and smaller.

    You don’t have the time to unwind these complicated transactions.

    If we put this mess into an ersatz Chapter 11, there would be risks, as in the foreign debt holders of the US saying, “You are screwing up our financial systems so we won’t buy your Treasury debt.”

    Another risk is that such a cram down / restructuring without an immediate government takeover would drive the financial industry to other countries – well, let’s face it, this catastrophe will likely have that effect over time and that will significantly damage the US and alter its position in the world long-term so why accelerate the move? If the Treasury steps in, then we have a chance to preserve our world position. If not, then imagine the financial world shifting overseas and think what that would do to America, to the cost of running this country and every business in it, to the value of American assets.

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  5. Jeff says:

    There are 2 problems with this analysis. First, the gov’t bail out of AIG was essentially a debt for equity (gov’t gets warrants with the right to buy 80% of equity if debt is not paid off). If the private sector comes to the rescue of AIG and pays off the gov’t loan, then the tax payer is not footing the bill.

    Second, the author fails to account for the fact that the creditors of AIG / Bear / Lehman are JPM / BofA / Citi etc. So his suggestion to force the mildly healthy financial institutions to take further write-downs on their debt is imprudent. More write-downs for the big / somewhat-healthy institutions would only cramp liquidity further.

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  6. d gvillain says:

    @11

    I think you have a good point (I’ve been saying the same thing myself) — we might have been better off if we had handled this on the front end. The only thing is that it’s probably too late now. Would have needed to happen a few years ago before the foreclosure crisis.

    @2

    Taxpayers taking advantage of easy credit?? You make it sound as if the opportunity to take out a mortgage were a charitable blessing offered by the financial sector. Subprime lending is not charity, it is business meant to garner profit. Even if these companies were making loans as a “favor”, they were private transactions and as such have little to do with taxpayers in general.

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  7. Alan says:

    Moving to Canada is looking good. ;-p

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  8. d gvillain says:

    @ 13

    “If the private sector comes to the rescue” — That is a really big “if”. With the onus no longer on them, I wouldn’t hold my breath waiting for the private investors to come and save the day.

    I like the second point, but I think it calls for hard assessments — not just speculation — to determine if creditors (many of whom, I think, are overseas and probably faring much better), can really withstand debt-write downs or not.

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