I cannot claim I know what's going on with the bailout, but that's OK. As far as I can tell, no one knows the full story either. So why not hear from all sides. Up now, free market economists:
Bryan Caplan (George Mason)
3. What's the one thing we should be doing that we're not?
Waiting a couple of years. Unemployment is only 6.1 percent; by standard measures, we're still not in a recession. Even if you have no libertarian sympathies, shouldn't you at least give familiar, low-impact responses (especially standard monetary policy) before you throw caution to the wind?
Robert Wright (NYU)
2. How bad are the current proposed bailout plans?
The current bailout plans are so bad it's impossible to tell just how bad they are with any precision. The devil, as they say, is hiding in details that are either undisclosed or will be concocted on the fly. For example, it is clear that some sort of tax will have to be placed on financial institutions that grow TBTF (too big to fail). If the tax is too high, financial services firms will stay small and the United States may lose, or be unable to regain, its competitive advantage in some important financial areas. If the tax is too low, financial services firms will merge and conglomerate at a rapid pace just to avoid "Lehmanasia" (euthanasia if they are not big enough to represent a systemic risk) during the next crisis. If the tax is just right, only those companies that need to be huge to compete internationally should be willing to pay it. The probability that regulators will get this and similar issues right appears small indeed given their track record.
Jeffrey Marin (Harvard)
1. How bad is the current market situation?The current situation is serious, but not so much because the economic conditions are especially bad. The situation is serious because policymakers seem poised to undertake an enormous intervention that will have huge adverse effects and may well exacerbate the very kind of problem the intervention is meant to fix.
Frederic Sauteta (George Mason)
2. How bad are the current proposed bailout plans?
See #1. The bailout is a terrible idea. It transfers a huge amount of wealth to people who do not deserve it. It will generate enormous incentives for creative bookkeeping as the investment houses and banks try to rid themselves of any assets they do not want. The bailout fails to eliminate the crucial policies that contributed to and caused the current situation, such as the Community Reinvestment Act, the creation of Fannie Mae and Freddie Mac, and so on. Last but hardly least, the bailout sets a terrible precedent: If you take huge risks and become too big to fail, the government will bail you out.3. What's the one thing we should be doing that we're not?
Getting out of the mess is not going to be easy. Once the perverse incentives are in the system, it's hard to go back. Bailing out is very bad and in the long run is worse than bankruptcy. It is not a coincidence that Paulson is the former CEO of Goldman Sachs and is now bailing out his friends. The problem is that bankers should be punished for their careless, stupid investments (JP Morgan, for instance, has $8.1 trillion in credit derivatives on its books), but since it was largely driven by the government's loose monetary policy and regulation, bankers are not the only ones responsible. Clearly letting the banks fail in the short run would have bad consequences for many households in the U.S. (and elsewhere). The problem is that the government does not have the incentives to intervene just for a short time. Once the banks are nationalized, it may take a while before the government leaves the place. Ultimately, this situation calls for radical policy solutions: The return to the gold standard and the abolition of central banks.Mike Munger (Duke)
3. What's the one thing we should be doing that we're not?
Let the price mechanism work. High gas prices, for example. We are trying to bring down gas prices. But high gas prices limit demand, elicit new supply, and make alternative energy more profitable. Same with low prices on mortgages and other financial instruments. Buying up worthless assets is like trying to drink the ocean to stop a flood. You can't do it.
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