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Why Economists Object to the Bailout Plan

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Why Economists Object to the Bailout Plan

A group of distinguished economists urges Washington to slow down. September 26, 2008

The Paulson bailout plan for financial institutions has produced a sharp split among economists, with many nonpartisan academic economists opposing or questioning it while many economists on Wall Street urge Congress to produce it. One prominent group of nearly 200 economists from the University of Chicago, MIT, Stanford, Harvard and dozens of other institutions have asked Congress to pause and spend at least a few days hearing testimony on the plan. The concerns of so many distinguished economists, including several Nobel Laureates, that sufficient deliberation must be taken before enacting such a consequential plan, should give pause to policymakers in Washington.

Their letter and objections are below:

To the Speaker of the House of Representatives and the President pro tempore of the Senate:

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, and 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.

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