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.