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.

Eve - GA

Tristin @25 - Thank you for the link to the Swedish article. VERY interesting...

So what do our leading economists say about the Swedish solution to the same problem?

bcc @34 - Excellent statement of the obvious... panicky thinking always results in poor results.

The Wiess Research white paper provides specific information on total mortages, consumer debt, corporate debt, & at-risk banks/thrifts:

EJC []

J Reese

Hi Friends,

I'm against the $85,000,000, 000.00 bailout of AIG.

Instead, I'm in favor of giving $85,000,000, 000 to America in a We Deserve It Dividend.

To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18+.

Our population is about 301,000,000 +/- counting every man, woman

and child. So 200,000,000 might be a fair stab at adults 18 and up.

So divide 200 million adults 18+ into $85 billon that equals $425,000.00.

My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.

Of course, it would NOT be tax free.

So let's assume a tax rate of 30%.

Every individual 18+ has to pay $127,500.00 in taxes.

That sends $25,500,000, 000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife has $595,000.00.

What would you do with $297,500.00 to $595,000.00 in your family?

Pay off your mortgage - housing crisis solved.

Repay college loans - what a great boost to new grads.

Put away money for college - it'll be there.

Save in a bank - create money to loan to entrepreneurs.

Buy a new car - create jobs.

Invest in the market - capital drives growth.

Pay for your parent's medical insurance - health care improves.

Enable Deadbeat Dads to come clean - or else.

Remember this is for every adult U S Citizen 18+ including the folks

who lost their jobs at Lehman Brothers and every other company

that is cutting back. And of course, for those serving in our Armed Forces.

If we're going to re-distribute wealth let's really do it...instead of trickling out

a puny $1000.00 ( 'vote buy' ) economic incentive that is being proposed

by one of our candidates for President.

If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+!

As for AIG - liquidate it. Sell off its parts.

Let American General go back to being American General.

Sell off the real estate.

Let the private sector bargain hunters cut it up and clean it up.

Here's my rationale. We deserve it and AIG doesn't.

Sure it's a crazy idea that can 'never work.'

But can you imagine the Coast-To-Coast Block Party!

How do you spell Economic Boom?

I trust my fellow adult Americans to know how to use the $85 Billion.

We Deserve It Dividend more than the geniuses at AIG or in Washington DC .

And remember, The Birk plan only really costs $59.5 Billion

because $25.5 Billion is returned instantly in taxes to Uncle Sam.

Ahhh...I feel so much better getting that off my chest.

Kindest personal regards,


T. J. Birkenmeier, A Creative Guy & Citizen of the Republic

PS: Feel free to pass this along to your friends as it's either good for a laugh

or a tear or a very sobering thought on how to best use $85 Billion!!


Susan Gibson

Please help us stop this madness, perhaps if you would ask us to add our names to your suggestions.

I think a lot of us are listening and will support you in your efforts.

Tim lynch

Americans need to stop thinking of themselves as victims of Wall Street greed and regulatory negligence, and start thinking of themselves as newly minted owners of one of the largest mortgage infrastructures in the world.

Fannie Mae and Freddie Mac could be the silver lining of the Wall Street bailout, presenting a unique opportunity understood by few Americans. We need to wake up to the fact that in addition to owning a pile of toxic sub-prime mortgages, we also own two massive mortgage companies we can repurpose for our benefit.

As taxpayers who begrudgingly came to the aid of failing lenders, we now have an opportunity to combine Freddie and Fannie into a more "homeowner friendly" mortgage company. As owners, we now have the right to change the rules and develop mortgage products favoring taxpayers instead of lenders.

To start, we should create new "retirement" mortgages. Retirement mortgages would be similar to conventional mortgages, but where traditional mortgage lenders keep all the interest paid over the life of the loan, retirement mortgages would rebate a large portion of the interest back to the consumer at the end of their loan.

These funds would be deposited into the consumers' Individual Retirement Account, Social Security Account, Health Savings Account, or some combination of all three. This is significant because the average homeowner with a conventional 30 year mortgage worth $150,000 actually pays over $350,000 in principal and interest during the life of the loan. That's over $200,000 in interest.

At another time in history of mankind this would have been called usury.

But here's the real bonus: it will help avert the next major financial crises, the looming Social Security bubble, because American homeowners will have been saving for their retirement every time they make a mortgage payment.

Retirement mortgages are also a good idea because they will help stabilize the housing market by making home ownership more attractive. They will also put a safety net under the recent 700 billion dollar bailout because as consumers refinance their private sector conventional mortgages into taxpayer owned retirement mortgages - beginning with the most credit worthy - billions of dollars of healthy mortgage securities will flow into the new system.

Clearly this is an idea outside the realm of historical mortgage lending practices. But we owe it to ourselves to at least begin the larger conversation regarding all our available options. This county is faced with unprecedented debt: Wall Street bailouts, Social Security and Medicare bubbles, a three trillion dollar war, and record foreign debt. We must meet the challenge head-on, and quickly, with new and innovative ways of solving fiscal problems.

Critics will say that converting Fannie May and Freddie Mac into a taxpayer lender is just another intrusion of government into our private lives, that the private sector should run business and government should remain in the background. Normally I would agree, but the current fiscal crisis makes that argument moot. What is clear is that large scale change needs to be made.

As reluctant owners of Freddie and Fannie we now have a solemn obligation to future generations to manage these assets responsibly. As taxpayers, we did not ask to get into the mortgage business, but in it we are. We need to make the best out of it. I believe it is time for a more equitable relationship between lender and consumer. That would be a bailout I can live with.

Tim Lynch

Orlando FL



If this bailout is passed I encourage all tax paying Americans to STOP paying your taxes.

An overwhelming majority of American taxpayers are not at risk from this financial meltdown. I don't borrow to fund my day to day expenses, and creditworthy individuals will always be able to find money for home loans, car loans, etc. Maybe a 20% downpayment and verification of employment will be required, but credit will be available. the same goes for companies seeking credit. Does anyone really belive Merck or Cardinal Health will not be able to get credit if they need it? The firms at risk are the ones who build an inventory of overvalued assets in order to boost their commissions, bonuses and stock values. Now the party is over and if these firms AND the individuals who invested in them (stockholders and bondholders) are going to take a hit.

Don't try to make your problem my problem. You can't privatize success and socialize failure.


Victor Grauer

Here's problem: "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."

What these "experts" fail to see is that "America's dynamic and innovative private-capital markets have brought the nation unparalled" DEBT. The word "prosperity" in this context absolutely stuns me. What prosperity???? Where? For whom? Sorry, I don't see it. What I see is mountains of debt.

It's very important to see the present situation, not as a mortgage bubble, but as a DEBT bubble. Inflating that bubble by incurring yet another trillion dollars of debt won't solve anything. The bubble is on the verge of bursting. Which should have happened years ago. Thanks to the efforts of Paulson, Bernanke and the economic "experts" who've supported them, the bubble has only gotten larger -- and every time it threatens to burst, the same solutions are offered: more debt. It's like paying off your credit card with credit from another card. Sooner or later you are going to play ALL your cards and your debt -- plus interest -- will be enormous. The trillion being requested is our very last card before the whole thing collapses and the whole country collapses. Do we really want to do this? Is it too late to pull back and simply let the bubble burst?



I am happy to see our economists stepping up to profess their concern. What is troubling, however, is their lack of direction on how to address this problem. Give us some answers! I was listening to one Senator asking what the assets of Fannie where. It's mortgages, stupid! They don't have any idea how to address these issues. They are politicians, not economists. We should have a panel of economists hashing this out over the weekend.


I am not an Economist.

There are more than 100 economists (including a Nobel Laureate) against the Paulson plan. Then there is Warren Buffett backing the plan.

Why should I (the people, the mob) believe a bunch of ivory tower academics instead of the Oracle of Omaha, who actually knows how to make money, and has more than empty rhetoric (about $5B more) to offer to solve the problem?

(Disrespect of academics exaggerated for theatrical impact)


$700B is $2333 for every man, women, and child.

This past summer's stimulus was what, $500, and not everybody qualified.

I realize this is comparing apples and oranges, but I find the comparison striking.


I'm kind of starting to see this as dumping more money into the market to deal with a bubble.


My car is most definitely a troubled asset. Anyone know a government willing to take it off my hands? Do I have to sell my interest to a financial institution first?

Paola Sapienza

Dear all,

the letter was intentionally short to capture the attention of Congress. The point of the letter is that it would be a mistake to act thinking that Mr. Paulson's is the only plan feasible to solve the crisis. In the opinion of many economists, there are alternative ways that do not impose such a big cost on taxpayers. Several detailed alternative proposals are being crafted right now and being submitted to Congress.

Best wishes,

Paola Sapienza


I don't think I like this phrase "sideline coaching". Since baseball did away with player-managers, coaching is largely a sideline affair. I move to have this termed "bleacher coaching". Can Congress vote on that (after due deliberation, of course)?

Richard Kenney

While I don't pretend to be an expert on economics, I do pay my bills on time, live within my means and have an excellent credit rating.

I oppose the “Wall Street” bailout. This is nothing more than “trickle down” economics that will only profit those that are responsible for the current conditions. Wall Street got itself into this mess and should have to work its way through it; even though people will lose money. (By the way, I have a 401K that is losing money by the minute—so be it!)

However, I don’t believe that the US government should do nothing. I support a US economy stimulus package in the form of a substantial amount of money (700 billion?) to be made available to the states for use to rebuild our failing infrastructure (thus creating jobs), and to “local” banks to provide low interest loans to domestic businesses (also creating jobs)and for home mortgages.

I also strongly believe that it is time that the US Government realistically addresses our astronomical debt.

Obviously, I realize that these ideas are “politically incorrect”, but, thanks anyway for allowing me to vent.



Paulette Paglia-Ng

Wonderful! Matt @49: Don’t try to make your problem my problem. You can’t privatize success and socialize failure.

I could not have phrased it any better.

Also, you are absolutely correct about credit. My husband & I just were given a $400,000 home loan (it's our first and we both make less than $70,000/yr). Credit is available. Oh yes they ask for proof of income but isn't that what a decent lending institution is supposed to do?

It's unbelievable to me that Congress really believes playing the Republican fear fiddle is a tune most of us will swoon under its spell. Don't fear their fear! All they desire is to make their greedy Wall Street cronies happy again - with OUR money!

This is a massive scam. It started with an elaborate shell game and now the grifters are asking their friends on Capitol Hill to bail them out with our money because they've been caught and the party is over.

Why not debt for equity? Why not have the managers and CEO's of these corrupt Wall St kingdoms return their enormous bonuses into their failing companies to create this precious "liquidity" we keep hearing about? Where is the accountability? In any other business, trade, venture etc....heads would be rolling (and not those of the innocent).

Why do the American people constanly fall for Dems/Repubs good cop/bad cop routine again and again? There is no difference between either party. Especially when you consider how quickly (Obama included) Congress called for the urgent need to be bipartisan but are never capable of bipartisanship when it comes to healthcare or education.

This is the biggest scam the western world has ever seen aside from Nazi plundering.



As an armchair Canadian watching from the sidelines (as it were), it is truly remarkable to watch the current Administration shift towards socialism in banking, and the financial markets. What's next? Universal healthcare?

Seriously, let Wall street clean up its own mess. Actions have consequences, and sometimes they really, really suck. Sometimes market speculation causes sky-rocketing food prices, and riots in the third world, and sometimes Wall Streeters need to go to bed without their bonuses.

Where's the world bank when you need it (kidding)?

Roll up your sleeves, take your lumps, and get back to work. You've got smart people working in the industry who can turn this mess around without Washington's (and Joe Blow's) tax money.



why don't they just kneel before Hank?

Jose Morales

Rating companies; How about to make rating companies accountable for the Wall Street mess, after-all they are "the experts" grading and down grading. It is very easy to interpreter dreams after the lotto numbers are thrown, even a blind can do it.

M Todd

What I do not understand is not all loans are bad, most are paying their loans. The assets are still there. For years the financial institutions have been bleeding people dry with interest rates, late fees, and interest upon interest that would make a loan shark envious.All legal all within the laws they had pasted with the help of their lobbiest.

What about the trillions of dollars they were making before this crisis? I run a business, I do not control the market and have been forced to pinch pennies, save, and take reduced profits. Why should the greediest industry in the history of this country get a bail out after decades of record profits?

It looks like the S&L scam all over again. You watch in the years to come it will show the same people who created the crisis will snatch up assets for pennies on the dollar and they will do it with tax payer money.


I agree with the letter. I agree with the posters who state - nice letter; it's of no help. Really, it isn't. The crit is the easy part, and so here is a body of expertise that's sitting around patting themselves on the back for doing something a guy who digs ditches could do? Lazy and unimpressive as a work in total. It's a prologue and should be treated as such. Come on geniuses, give us a set of semi-consensus recommendations (I’m not being sarcastic here.) Where is Milt when you need him?