Several Boston-area economists are among the dozens who have signed a petition condemning the Bush administration's bailout plan. They include M.I.T.'s Daron Acemoglu; Harvard's Claudia Goldin, Oliver Hart, Jeffrey Miron, Julie Holland Mortimer, and David Scharfstein; and Boston College's Philip Strahan.
They list three objections to the plan, in a statement targeted at the leaders of the House and Senate:
1) Its fairness. The plan is a subsidy to investors at taxpayers' expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, Americas dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
Matt Yglesias notes a shortage of "superstar" names on the petition, but it seems fairly safe to add Harvard's Greg Mankiw to the roster of economists with concerns. On his blog, Mankiw links enthusiastically to a Naked Capitalism commentary entitled "Why You Should Hate the Treasury Bailout Proposal." And he quotes approvingly the following comments from Allan Meltzer, a political economist at Carnegie Mellon, delivered by Meltzner on the PBS NewsHour:
If they're going to do something, then what they ought to do is make loans, which the financial institutions have to repay with interest. And if you think -- that's an idea which the Chileans have used in a bigger crisis than this for them in 1982, and it worked for them. People paid back the loans. They weren't allowed to pay dividends until they repaid the loans. They weren't allowed to take bonuses until they repaid the loans. I think that's the way -- if we're going to do this, then that's the way we should do it.
The Administration seems to have imagined that the atmosphere of crisis would cause people to swallow any doubts they had about the specifics of the bailout, but that hardly seems to be what's happening.
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