Wednesday, September 24, 2008

Economists opposed to the Paulson plan

Some big names in finance and economics here. Hat tip to Gregory Mankiw whose posts I am grabbing a lot lately. The last signatory on the list of eminents is Luigi Zingales who has a fascinating article in The Economist's Voice, Why Paulson is Wrong, which suggests how the crisis should be handled. I excerpt a segment:
'....it makes sense in the current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the financial sector. It has the benefit of being a well-tested strategy in the private sector and it leaves the taxpayers out of the picture. But if it is so simple, why has no expert mentioned it?

The major players in the financial sector do not like it. It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain. Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition'.
I don't like the idea of the 'captains of the universe' and the greedy investors claiming huge profits and then seeking to socialise the disasterous losses they impose on themselves and society. But my anger directed at this lot, strong as it is, is tempered by the view that a lot of innocent people get hit in any major financial collapse. I'll let the financial experts work this one out but I am always surprised at how destructive errant financial markets can be when they run amok.

On this last point Gary Becker, while pointing to the costly implications of the bailout for future financial market moral hazard (future financing will be biased toward bonds rather than equity) and the unfortunate US taxpayer, broadly would agree with my caution. He writes:
'Despite my deep concerns about having so much greater government control over financial transactions, I have reluctantly concluded that substantial intervention was justified to avoid a major short-term collapse of the financial system that could push the world economy into a major depression'.

3 comments:

Sir Henry Casingbroke said...

There is a suggestion that Wall St players are shitting themselves lest Dubai and/or the rest of Emirates area, which is awash with cash, will come in and help themselves to the major Wall St houses for pennies. This is the reason why there is this push to bail them out - to keep out the sheiky bargain hunters.

Furthermore: I am curious Harry, who turned off the US liquidity and why? China? The Arabs, China and Japan hold a lot of US bonds. A lot. Maybe China turned off the tap for US's own good. Like a parent cutting off a naughty child's allowance.

I think the war party in iraq and Afghanistan made the US lose a sense of proportion.

Recall that due to the financial pressures created by the Vietnam War, the US went off the gold standard and onto full fiat, which has arguably now made the excesses of the system more precarious. I am not necessarily advocating son of Bretton Woods but am merely pointing out that fighting wars is extremely expensive - now, and in the past. It has always been thus. Read Shakespeare.

WWI cost Britain her empire, WWII cost it some more. Afghanistan intervention bled the Soviet Union dry and contributed to its economic collapse, or at least, made its support of unviable clients (like Cuba, and the Warpac) unsustainable thus ending its empire.

Iraq is, I am afraid, H, USA's Waterloo. It is time for the Seppos to cut and run.

Spiros said...

Sir Henry, quite so. The trillions that the US has pissed up against the well in Iraq would have been quite handy in fighting the current crisis.

The US is rich, but not that rich. Not even they can afford two blunders simultaneously that each cost trillions.

The twin blunders both have resulted from US Republican Party hubris. They thought they are the masters and can do whatever they like.

Well, they aren't and they can't.
The only remaining question is whether they will be punished sufficiently for their crimes.

Anonymous said...

warhammer gold warhammer money warhammer accounts tibia money tibia gold tibia item runescape accounts buy runescape accounts runescape money runescape gold runescape gp runescape power leveling runescape powerleveling cheap rs2 powerleveling runescape equipment buy rs equipment runescape runes cheap rs2 runes runescape logs cheap rs2 logs runescape items buy runescape items runescape quest point rs2 quest point cheap runescape questpoint runescape gold runescape items runescape power leveling runescape money runescape gold buy runescape gold buy runescape money runescape items runescape accounts runescape gp runescape accounts runescape money runescape power leveling runescape powerleveling tibia gold dofus kamas buy dofus kamas wow power leveling wow powerleveling runescape questpoint rs2 questpoint Warcraft PowerLeveling Warcraft Power Leveling World of Warcraft PowerLeveling World of Warcraft Power Leveling Hellgate money Hellgate gold buy runescape logs buy rs2 items cheap runescape items Hellgate London gold Guild Wars Gold buy Guild Wars Gold runescape items rs2 accounts cheap rs2 equipments lotro gold buy lotro gold buy runescape money buy runescape gold buy runescape runes lotro gold buy lotro gold runescape money runescape gold cheap rs2 powerleveling eve isk eve online isk buy runescape power leveling rs2 power leveling tibia gold tibia item runescape accounts Fiesta Silver Fiesta Gold Scions of Fate Gold Hellgate Palladium Hellgate London Palladium SOF Gold Age Of Conan Gold AOC Gold ArchLord gold tibia money tibia gold runescape accounts runescape gold cheap rs2 powerleveling buy ArchLord gold DDO Plat Dungeons and Dragons Online Plat