FINANCIAL CRISIS: More On The Meltdown
Bank Bailout: Scholars’ Views Fuel Republican Revolt
The Chronicle of Higher Education News Blog, September 26, 2008
After [last week’s] bailout negotiations collapsed, Sen. Richard Shelby, a Republican of Alabama, stood outside the White House and waved a petition signed by more than 200 academic economists who have doubts about the Bush administration’s cure for what ails the financial sector.
The petition, which was drafted by five scholars at the University of Chicago and Northwestern University, asks 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.”
One of the petition’s authors [is] Paola Sapienza, an associate professor of finance at Northwestern’s Kellogg School of Management:
“Everyone [who signed the petition] agreed on the flaws of the administration plan. As for the right way to act, there is a large number of solutions out there.
“I think getting it right is very important. And I don’t feel the urgency of making a decision in the next couple of days.
“I think it would be a huge mistake to rush.
“Because there are so many potential alternatives, I think
• opening up the debate,
• holding hearings,
• taking some time
[would be] the right thing and the democratic thing to do.”
Away from Wall Street, Economists Question Basis of Paulson’s Plan
The Washington Post, September 26, 2008
The Bush administration’s pitch for a sweeping bailout of the financial system has centered on two simple premises:
• that the economy could suffer a crippling downturn if action is not taken quickly, and
• that this should consist of the government buying troubled mortgage securities from banks and other institutions.
But many of the nation’s top economists disagree with one or both of those ideas, even as many top political leaders have swung behind them.
Critics of the Bush plan can be roughly divided into two camps:
• One group thinks money should be directly infused into banks, which should allow it to trickle down through the financial system to borrowers.
• A second group thinks the government should buy individual mortgages [to help] ordinary Americans more directly, with the benefits trickling up to the banks.
[The Bush plan] is somewhere in between: buying up packages of mortgages and hoping that the benefits spread both up to banks and down to households.
Almost 200 academic economists…have signed a petition objecting to the plan on the grounds that:
• it could create perverse incentives,
• it is too vague, and
• its long-term effects are unclear.
Economists tend to agree that the nation’s economy is at risk as the flow of credit threatens to freeze.
But many with a deep theoretical knowledge of finance [plus] experience in government [also] are skeptical of the structure of the administration’s plan—and the speed with which it has been crafted.
“There is a kind of suggestion…that if only we provide enough money to financial markets, this problem will disappear,” said Joseph Stiglitz, a Nobel Prize-winning economist.
“But that does nothing to address the fundamental problem of bleeding foreclosures and the holes in the balance sheets of banks.”
Many economists fault the Bush administration and Congress for moving so quickly on the bailout package without allowing more time for debate.
Moreover, some economists said the proposed $700 billion may not be enough to address all the problems stretching across the financial landscape.
Simon Johnson, a professor at Massachusetts Institute of Technology and former chief economist at the International Monetary Fund said:
“This cannot be the ultimate, decisive solution if you are not addressing the underlying cause.”
The bailout plan is short on details, instead giving the Treasury secretary wide latitude to determine how to execute the purchases of mortgage securities.
“There are still many questions,” said Myron Scholes, a retired professor at Stanford University and Nobel Prize winner, adding:
• how long the government holds the assets and
• how they are later resold
would be the keys to determining whether the plan works.
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