Ben Bernanke has taken a distant backseat to Hammerin’ Hank Paulson on the Great Wall Street Bailout, and his erudite fans are beginning to shower him with boos.
Chairman Bernanke, it’s time to grab the reins and lead. With all due respect, Chairman Bernanke, you have led the Fed admirably in the charge against the current financial hurricane in the past thirteen months with numerous innovations and timely measures, but you have to do more now than endorse the Paulson rescue plan… I am sure you were consulted on the details of the plan and the Fed has a fleet of experts to study and evaluate it. Economic and financial experts of different political persuasions are united in their view that the Paulson plan needs improvement. In addition, members of Congress are not convinced of the merits of the plan. There is no reason for a hasty passage of a faulty plan. The Paulson plan surely did not strike you as the best solution.
The numerous facilities established at the Fed to obtain funds and the nationalization of Fannie
Mae and Freddie Mac have bought the time necessary to examine all other solutions. With all
due respect, Mr. Bernanke, declare that a package whose proposals and implications are not
thoroughly examined should not be the burden of taxpayers. Of course, you may need to say this in more diplomatic terms. The ongoing debate in Congress, calls from the public to
representatives of Congress, and the fact that the press is inundated with critical comments and
letters to the editors are examples of the plan’s serious weaknesses. Call upon Congress for a
special session to examine the issues carefully with full representation from experts. You have the stature, credibility, and leadership to declare this is as a necessity. It would be a serious lapse of leadership if alternatives and/or improvements to the Paulson plan are not considered.
Paul Krugman, Princeton and The New York Times:
Something needs to be done. This is looking a little bit — I’m going to do the scare talk here. This looks a little bit like a high-tech 21st-century version of 1931 of the great banking panics that brought on the Great Depression. And nobody wants to see a repeat of that.
That said, that doesn’t mean that we have to do now, now, now, this week, exactly what Hank Paulson says.
So it’s worth taking some time to do it right. And we should say that the most critical credit market, which is the home mortgage market, has actually already been rescued. We just nationalized Fannie and Freddie.
And so I think we have a little more leeway. I think that we need to cool this a little bit and say, “Yes, OK, we’re going to do this, but it doesn’t have to be this week.”…
The federal government is going to have to put money into that system, but it has to do that in the way that at least gives taxpayers a reasonable interest in what happens. That hasn’t come from Treasury…
I think, if we’re going to be essentially providing public capital for firms, essentially what we’re calling for is we’re — this is calling for Uncle Sam to be what, you know, in finance we call a white knight, somebody who comes in with capital to rescue a firm that doesn’t have enough capital.
I think Uncle Sam does need to be the white knight, but the white knight always, you know, gets a piece of the pie, gets ownership.
Allan Meltzer, Carnegie Mellon:
It’s a terrible idea. It’s undemocratic. It’s bad economic policy, and it’s bad social policy. And it has a very little chance of solving the problem in a meaningful way…
I’ve listened to governments tell me for 40 years that there was a crisis and the world was going to fall apart if we didn’t do this or that. But there have been a few cases where they weren’t able to do that.
One was the commercial paper crisis in 1970. There have been several others. The world did not fall apart. Last week, we had Lehman Brothers went into bankruptcy. Within three days, most of the assets were sold.
We had AIG turn down three offers to buy the company because they thought they would get a better deal from the government. It turned out they didn’t get the better deal from the government. Now the stockholders suddenly woke up and said — the major stockholders said, “We’d like to buy the company.”
Well, that’s what I think we need to do. We need to get the government’s hand out of this, and let’s see whether we can’t get a market solution.
The market people caused this problem. They ought to be the ones that pay the cost of having it cleaned up…
[I]f 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.
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