Economic plan has major shortfalls, professors say

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• 1:02 a.m. on Sept. 24th, 2008

  Posted by

  Hanky-Panky

  This article totally distorts the tenor of the panel. Both Krugman and Blinder were highly critical of the bailout plan as currently proposed! Read Krugman's column in Monday's Times for his actual views on the matter. Yes, "something major" needs to be done, but the Bernanke-Paulson plan, at least in its initial form, "doesn't make sense" (dixit Krugman).

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• 1:14 a.m. on Sept. 24th, 2008

  Posted by

  Hanky-Panky

  Here's a more accurate summary of the debate:

  The Trenton Times
  Panel urges careful scrutiny
  Princeton profs agree on oversight
  Wednesday, September 24, 2008
  BY BILL MOONEY

  PRINCETON BOROUGH -- Despite the severity of the Wall Street meltdown, the federal government's proposed solution -- a $700 billion bailout -- is so far-reaching that it requires careful scrutiny and should not be rushed into action.

  That was the general feeling of four Princeton University economists who participated yesterday in a wide-ranging discussion of the financial crisis that began with the subprime mortgage implosion and has led to such unprecedented steps in the last couple of weeks as the federal government taking over mortgage titans Fannie Mae and Freddie Mac and making an $85 billion loan to insurance giant American International Group.

  Proving that the devil is in the details, professor Paul Krugman pointed out that the bailout proposed over the last few days by Treasury Secretary Henry Paulson contained a clause designed to rule out one of the very things the economists agree is needed: oversight.

  The so-called Section 8 of the proposal stated in part that the decisions of Treasury are "non-reviewable" and "may not be reviewed by any court of law."

  With such a clause included, Krugman said, "there is no longer any reason to believe that any of this is being done in good faith."

  But professor Alan Blinder, who was a member of President Clinton's original Council of Economic Advisers, said that he doubted that such a clause will remain by the time this proposal is placed into action. "As Paulson forgot," he said, "there is a Congress."

  In addition, the proposal contained another clause stating that Treasury would be authorized "to buy assets ... or anything else." Blinder said that also will not last as the plan winds through Congress.

  The panelists -- including professors Markus Brunnermeier and Harrison Hong and moderator Hyun Shin -- explained that there is little reason to hurry through in a few weeks a remedy for a problem that has been decades in the making.

  Echoing concerns expressed in the last two days by Wall Street and Congress, Krugman said the federal government's plan to buy up the troubled assets of the financial institutions leads to two unanswered questions: which assets and at what price?

  If the government buys up bad debt at pennies on the dollar, that won't help matters, he explained, and the only way to help banks is to buy up the bad assets at a higher price, but the details have not emerged as to how this will be accomplished.

  Blinder added that there is no reason to throw all $700 billion at once at the problem. "Might we learn something from the first $100 billion?" and how it is used, he asked. The financial markets, he said, want reassurances that the problem will be addressed; they won't collapse if the proposal is not completed within a few weeks.

  The economists talked of how the problem grew out of the 1980s-era philosophy of "no job no problem" when it came to approving mortgages. Hong said investment banks purchased bad mortgages with borrowed money, "an insane amount of borrowed money."

  "We've had a 25-year run of pretty limited regulation and (a lot of) risk-taking," Hong said.

  "There are a lot of losses we can't make go away," said Krugman, who added that he believes that prices will continue to fall and the housing market will stay in decline for some time.

  But there is a chance the taxpayers could ultimately break even if this bailout is handled carefully before being placed into action, the economists said. "There will be transparency," said Blinder, the co-director of the university's Center for Economic Policy, "there will be oversight."

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