Economists Denounce Paulson Bank Bailout

Although lawmakers have reportedly reached a tentative deal on Henry Paulson‘s $700 billion-plus bank bailout, more than 180 economists are begging policy makers to reject the plan.  (A news report on the economists’ protest is available here.)

Here is the text of the letter (minus the signatures) that the economists sent to Capitol Hill:

To the Speaker of the House of Representatives and the President pro tempore of the Senate:
 
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
 
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, America’s 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.
 
For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come. 

In a blog post entitled “Insanity,” economist David K. Levine (who signed the letter) writes that the bailout legisation

…says simply that the Treasury secretary is given a 700 billion dollar credit line and told to go out and play the mortgage backed security market, appointing whoever he chooses, and buying and selling without any oversight, concurrent or retroactive. Can I imagine a better prescription for political corruption? I’m not imaginative enough. I’m imaginative enough to think that however good the intentions of the (politically appointed) Secretary might be, the people who do the buying and selling will feel sympathetic to their friends and will want to do what they think the boss man would “want them to do” towards his friends. Some will not give in to the temptation. Others will. And on the other side those who receive lesser bailouts will think that it is unfair and driven by politics – regardless of whether or not it is.

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