×
Via Matt, another prominent economist comes out in support of the Treasury Secretary's plan. Here's Nobel-winner Mike Spence:
At the same time, in widely-publicised remarks, several prominent economists criticised the plan, arguing that it provides government/taxpayer “cash for trash,” constitutes a huge giveaway and robbery of the US taxpayer. This is a mistaken view. It is based on an assumption that debt will be overused by the government and the participants in cases where the left-tail or downside risk is very high.The plan is designed to restart frozen markets in securitised assets, and inject capital whose value is easier to understand. These are important steps in restarting the private credit system. But not the whole package. It is not intended to solve the potential insolvency problem. That will take direct injections of capital and expanding government ownership, once the insolvencies become clear.Matt goes on to posit that the real difference between the administration and its critics is that the critics think that "inept, or unduly under the sway of big finance." That's problematic-- most of those same critics are arguing that the administration should seize the banks, putting them in the awkward position of saying inept and compromised people should be taking over and restructuring the financial system. While almost all critics of the plan tend to focus on the political power of financiers, I'd say most of the economists are focused on the underlying mechanics of the strategy and the "liquidity vs. solvency" debate.There are two larger problems with criticisms of Geithner's response to the financial crisis. One is that critics often assume that PPIP is somehow independent of the other mechanisms of financial recovery or the "last word" in strategy when it's clear, from Geithner's public statements explaining the plan and his request for extensive authority to take over financial institutions, that this simply isn't the case. The second is that people focus on the subsidy aspects of the plan as a "give-away" that lessens government profit without assessing the benefits of moving the assets off bank balance sheets, or assume that the system will be gamed before the government even executes it -- and that might not even be a bad thing!Once you get past both of those problems, you get to Matt's central point that the critics and the administration do have a basic agreement about the facts of the situation, and even folks like Simon Johnson recognize the political constraints preventing the government from getting further ahead of the problem.
-- Tim Fernholz
