The Rescuers get filleted

At first the idea of the massive government bailout sent stocks soaring at the end of the week. Economists were shiftless when it came to accepting or condemning it. Well, as details of the plan begin to leak to the media, some economists are beginning to condemn it. Whether or not this shifts public opinion, and therefore congress is hard to know at this point. Some early opinions:

Paul Krugman at NY Times:

I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.

…there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving….

Sebastian Mallaby at the Washington Post:

With truly extraordinary speed, opinion has swung behind the radical idea that the government should commit hundreds of billions in taxpayer money to purchasing dud loans from banks that aren’t actually insolvent. As recently as a week ago, no public official had even mentioned this option. Now the Treasury, the Fed and congressional leaders are promising its enactment within days. The scheme has gone from invisibility to inevitability in the blink of an eye. This is extremely dangerous…

…In practice this means the government would make subjective choices about which bad loans to buy, and it would pay more than fair value. Billions in taxpayer money would be transferred to the shareholders and creditors of banks, and the banks from which the government bought most loans would be subsidized more than their rivals. If the government bought the most from the sickest institutions, it would be slowing the healthy process in which strong players buy up the weak, delaying an eventual recovery. The haggling over which banks got to unload the most would drag on for months. So the hope that this “systematic” plan can be a near-term substitute for ad hoc AIG-style bailouts is illusory….

…Taking bad loans off the shoulders of the banks seems like a merciful rescue; ordering banks to raise capital or buying equity stakes in them sounds like big-government meddling. But we are in the midst of a crisis, and it shouldn’t matter how things sound. The Treasury plan outlined on Friday involves vast risks to taxpayers, huge complexity and no guarantee of success. There are better ways forward…

In an election year that has been famously anti-economist it’s hard to know if these comments are going to penetrate the larger electorate, not necessarily known for reading the NY Times Op-Ed pages, let alone Paul Krugman’s blog. It is worth noting however, that Barack Obama lept up to support this plan, before the details were known and McCain denounced it on the same terms. In the end, something needs to be done to stabilize the markets and restore liquidity. But it’s important that prudent steps are taken, not rash ones that end up costing trillions in tax-payer subsidy debt.


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