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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Bobby G,
While you have a good point that there should be more concrete things and less “make sure you be careful!”, there is one solid concrete message in this letter: Wait.
This is important because congress right now is considering putting this bill through on the fast track and many politicians are urging this to go through as fast as possible. So it was important that Sapienza acted quickly in getting this brief letter to congress.
Hopefully, if this has the intended effect, Congress will wait, given all the economists involved more time to give and discuss more concrete advice. I’m sure there won’t be as much consensus on a concrete plan as was in this letter, but consensus isn’t nearly as important as just making sure we come up with a solid plan to deal with all of this, be it action or inaction. And that plan, we can hope, can be better made with more time.
Why does no one think this is a deliberate bankrupting of the US government? I really want to know why no one here has reached that obvious conclusion.
I haven’t seen anyone addressing the fact that Paulson’s plan seems to be an open commitment to bail out any bad debt held by any investor in the world. US taxpayers simply can’t meet that commitment. Even Gordon Brown has said that he won’t ask British taxpayers to bail out British banks – much less foreign banks.
If Paulson limits the bailout by US citizens to US banks, extensive oversight with severe penalties will be needed to ensure that the pigs on Wall Street don’t go to foreign investors, buy up the bad debt at 5 cents on the dollar and sell it to taxpayers for 30 cents per dollar.
I appreciate that so many University of Chicago economists are advising caution, but is that really the best they have to offer? Then who needs them?
I don’t see anything in those 3 pitfalls that requires specialization or credentials in academic economics to identify.
What I don’t understand in this entire debacle is the role of the reality that there is some solid core value here. The bottom is not zero. Confidence will return to our financial system when it is purged of the crap resulting from poor decisions by borrowers, lenders, and investors. Putting that crap in the hands the government only shifts the cost of the inevitable losses away from those who are fault and chose to bore the risk.
Outside of individuals who were illegally fed misinformation and are now destitute because the house of cards tumbled, the pain must be felt. Unless the pain is felt by those who made those poor decisions and any taxer-payer funded salve saved for those who were innocently pulled down with it, I simply cannot understand the purpose here.
America is a good place for investment not solely for the (supposed) stability of our infrastructure but because America is fundamentally well structured economic entity which encourages production and innovation and rewards them accordingly. The people who took advantage of that fact by exaggerating it and leveraging themselves to the hilt to get rich deserve their fate. The nation and it’s economy will survive the loss these leeches and other, more responsible (and more heavily regulated) companies will arise in their wake.
@ 6 above:
That’s not how these mortgage backed securities work. Instead they are combined into large pools, and then they chop these up into a large number of various grade bonds.
I was hoping to find a thoughtful and independent economic analysis. I logged into the internet today to find that everyone has become an armchair economist.
@ Dan (#9),
I can appreciate, certainly, the need to get things right, but in the context of the article, is that really something that the economists needed to bring to the attention of legislators? Is this paper really something to laud as the unification of great economists? I don’t really think so. What member of Congress is going to see this letter, read it, and say, “Gee, I hadn’t thought of that?” If there’s more than zero, people need to think harder about who they vote for.