Economic plan has major shortfalls, professors say

Editor's note

An incorrect version of this article was accidentally posted online early this morning. This is the correct version, which is identical to the story published in the print edition. The first two comments posted below refer to the earlier version.

Students, faculty and community members packed into McCosh 50 on Tuesday afternoon to hear a panel of distinguished economics professors offer insight on the current crisis in the financial markets.

The event, which featured economics professors Hyun Shin, Markus Brunnermeier, Harrison Hong, Paul Krugman and Alan Blinder ’67, was simulcast in McCosh 10, Dodds Auditorium and Bowl 001 in Robertson Hall due to the large number of people who attended the event.

The event lasted for more than 90 minutes and included technically advanced presentations to present empirical data relevant to the topic.

Krugman, a columnist for The New York Times, went over the details of the $700 billion bailout for financial firms announced Saturday by Treasury Secretary Hank Paulson. Paulson and Federal Reserve Chairman Ben Bernanke presented the plan before a critical Congress on Tuesday.

Krugman said that the problem isn’t necessarily “taking troubled assets off the financial institutions’ balance sheets” but also “at what price” the assets will be sold. He went on to warn that it would be a “substantial taxpayer risk and [a] gift to firms involved.”

He criticized a lack of “details on how money will be spent” and the lack of oversight in early drafts of the legislation.

In his column in Monday’s Times, Krugman said that while something major must be done, the plan proposed by Paulson “doesn’t make sense.”

“He’s making it up as he goes along,” Krugman wrote. “Just like the rest of us.”

Blinder, a former vice chairman of the Federal Reserve, said that if the government steps in, there is the chance for “a negative cost” to taxpayers in the long term.

He offered two significant proposals for the bailout bill, including “substantial transparency and substantial oversight” and a specific list of “what assets to buy.”

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Blinder also pointed out that Congress is in a significant rush to pass the bill and that both parties have shown willingness to cross party lines.

During the discussion, Hong gave a clear picture of how the current crisis resulted from the burst of the housing bubble.

The major investment banks “were caught holding bad mortgages … bought with lots of borrowed money,” he explained, adding that the subprime mortgage crisis was a “great business while it lasted.”

The people who had jobs in the subprime mortgage markets “couldn’t get enough,” Hong said, adding that this eventually had detrimental effects for the entire economy.

Shin emphasized that as some major investment banks made larger investments through borrowing at high levels, they eventually became insolvent or nearly insolvent.

The panelists then shared their opinions concerning how the government is handling the crisis, the massive rescue of Fannie Mae and Freddie Mac and what could potentially happen in the coming weeks and years.