The government’s plan to buy equity in financial institutions, announced Friday by Treasury Secretary Henry Paulson, is an idea that many academic economists have championed from the start of the crisis.
Many economists believed that the heart of the government’s initial plan to pay $700 billion for toxic assets was aimed at the wrong target. Purchasing mortgage securities from banks wouldn’t do anything to kick-start lending and get credit flowing again, they said. Rather, banks would use the proceeds they got from the Treasury to pay off debtors, and those debtors would use the proceeds to buy safe assets.
They said a wiser course — the one the Treasury now seems to have come around to — was for government to rebuild the badly depleted cash levels on bank balance sheets. That would cushion institutions against future losses, giving them the wherewithal to lend again. Other hitches in the original plan include coming up with a price for mortgage securities that is above the “fire sale” level they would draw on the open market, but not so high that taxpayers end up getting taken for a ride.
A few weeks ago Paulson’s plan was the only possible way to save the economy, and the bill had to be passed right away, and anybody who questioned it was an ignoramus who was recklessly jeopardizing the whole economy.
Now: oops, that wasn’t the right plan after all, but don’t worry, there’s a new one, which by an amazing coincidence requires exactly the same amount of money. And this one will work for sure, because this time, well, this time he consulted economists!
I will sleep well tonight for the first time in months. What could possibly go wrong?
It’ll sure be interesting to see what stock prices do tomorrow. I’ll bet they’ll rise. Even if stock prices merely stabilize this week, that will help ease the temptation to panic.
Economists haven’t really been consulted since the supply siders came to power. “Tax cuts” isn’t a way of looking at the economy economically. Its more like a religion.
A better view is that sometimes tax cuts work. sometimes taxes are useful. however, these economists have studied the depression.