Economists on the Bailout

The only thing that seems to be moving faster than the financial crisis is the policy debate. The latest development is a statement that summarizes what I think of as the emerging consensus from academic economists; it expresses concern about various aspects of both the Paulson plan in particular, and the policy process in general.

Here’s the letter, which was — just minutes ago — sent to Congress:

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, 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.

Why do I call this the consensus view? Well, the letter was signed by over 100 (and growing!) of the leading economists I know — including folks who have very different views about just what got us here — who vote left, right, overseas, or not at all. The core group includes folks you’ve already seen on this blog, including Anil Kashyap and Luigi Zingales, as well as the always-wise John Cochrane, Rob Shimer, and Paola Sapienza.

The full list of signatories is available here; it is an astonishing group.

And if you would like to add your name to the list, touch base with Sapienza, who has done a splendid job in coordinating this effort in a short number of hours.

About six months ago, I expressed some concern that the economics profession was staying on the sidelines during what was then an emerging crisis. Today, I’m proud to say that macroeconomists are working hard to have their voices heard in this hour of need. These are — by any measure — extraordinary times, and while we don’t always agree with each other, it is an amazing time to be a macroeconomist.

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  1. Bobby G says:

    I don’t know, Justin, it still sounds like sidelines coaching to me.

    The letter essentially states, “You are doing something. We, as economists, agree that something should be done. Please do it right and do not make stupid decisions.”

    I certainly agree with these points but it’s not like these are new ideas or concerns. It almost like these economists want to be on this letter just in case things go wrong for one of these reasons so they can say, “I told you so.”

    I would much prefer specific suggestions and analysis. That would be more productive towards finding a solution, rather than a “take your time” warning. It’s not a bad thing, this letter, but it’s no great advancement in the field of economics. At least in my opinion.

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  2. dave says:

    Hopefully someone inside the beltway will slow down and listen to what the have to say…

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  3. Alex says:

    Well, it can only be sidelines coaching. It’s the congress that has to actually pass the legislation.

    But the real point — the conclusion — is not in the numbered paragraphs. It is in the last paragraph.

    * Don’t rush.

    * Despite what Paulson and Bush say, this should not be pushed through so quickly that it isn’t properly debated and vetted.

    Think of NCLB and the PATRIOT Act. How well were they thought of once they were understood? The adminstration rammed them through congress without full vetting, and look at what happened. (Whether or not you think that these acts were beneficial overall, there’s no question that each could have been substantially improved.)

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  4. TA says:

    Bobby G is dead on – this is nothing to be proud of. “Take your time” and listing concerns without specific policy advice doesn’t meet the litmus test of “working hard to have their voices heard in this hour of need” or even getting off the sidelines.

    Give us some suggestions on what the right direction might be rather than a critique.

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  5. jonathan says:

    Point #2 is the key: “illiquid and opaque assets.” What assets are we buying? Are we buying credit swaps or other derivatives? If so, then the market is many, many, many trillions of dollars. If so, then we’re betting that these giant markets recover when they’ve been shown to be shams & frauds. If so, then are we assuming that these markets will somehow recover when a) they’ll be regulated, b) the actual risks are now known, c) everyone is watching so the obligations can’t be hidden and d) the economic case for the existence of these markets is dubious. To take just the last point, while hedging risk is a good idea, do we really need that much – when each Wall Street firm has trillions in such obligations and the total is more than all the money on Earth?

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  6. Dan says:

    I have a question. How cheap are these morgages actually trading right now. If you owe $100k on a morgage and the bank is going to sell it to another bank or the Fed at $0.50 on the dollar it would be worth raiding the 401k. Could people buy back their own morgage? Wouldn’t a bank be willing to lend the person money to do this because the loan would be a fraction of the property value again. My guess is that morgages are probably trading at more like .90 on the dollar. If people were able to buy back their own morgage we would have an interesting situation where people with the worst credit were getting the best deals.

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  7. S. M. Cook. says:

    The proposed bailout runs contrary to the core philosophies of those putting the paln forth.

    The bill is due, and should be dealt with by private capital, hypothetical consequences notwithstanding.

    But, of course, right?

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  8. Sandi Mays says:

    Thank goodness. Unfair, ambiguous, untested and George W. Bush wants to rush it to approval.

    I vote no!

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