Wednesday, September 24, 2008

Economists write open letter of protest to US Congress

A great many noted economists have signed on to a letter urging Congress not to be rushed to a hasty decision about the current financial situation: "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."

Addendum: Allan Meltzer says give them loans, don't buy their bad debt.
And if they're going to do something, then what they ought to do is make loans, which the financial institutions have to repay with interest. And if you think -- that's an idea which the Chileans have used in a bigger crisis than this for them in 1982, and it worked for them.

People paid back the loans. They weren't allowed to pay dividends until they repaid the loans. They weren't allowed to take bonuses until they repaid the loans. I think that's the way -- if we're going to do this, then that's the way we should do it.
Thanks to Greg Mankiw who used the same quote.

Addendum 2: Arnold Kling reaches for the plunger.
The heavy use of the plumbing metaphor almost makes one picture Paulson with his pants riding down a couple inches, leaning over a financial toilet bowl. It is clogged with unwanted securities backed by mortgages, supposedly because the sellers cannot find any buyers.

However, the market could be clogged because the prospects for a bailout are destroying the motivation to sell mortgage securities. If you sell this week and take a big loss, you will look pretty stupid if there is a bailout next week where comparable securities fetch much higher prices.

It could be that a Congressional rejection of the bailout proposal, rather than clogging the markets, will unclog them.
Ben Bernanke and Henry Paulson are asking Congress for a $700 billion stake to enter this business at a time of unprecedented difficulty in predicting home prices. If they were taking their plan to a venture capital firm to seek funding, they would be laughed out of the office. Their proposal is sketchy, with no financial projections included. Their qualifications for running the business are unimpressive-neither Bernanke nor Paulson has a background in mortgage default modeling. The business is sure to be encumbered with all sorts of political mandates and requirements from Congress, imposed by the same Congressional leaders who encouraged Freddie Mac and Fannie Mae to plunge into subprime mortgages.

The risks of enacting the plan are far worse than the risks of doing nothing.


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