Saturday, September 20, 2008

Too much to report on

Too many developments to report on regarding the financial crisis. As I try to catch up here are some good links.

Joe Nocera has a good column on why Paulson's plan may be a failed Hail Mary Pass.
Luis Zingales has a very good note on the problems with the new RTC plan.

Both of the articles point out how difficult it is to value the toxic assets that the new agency will buy. This leads to a very good chance of a huge taxpayer transfer to the financial institutions. Or it will not solve much.

Then there is the ban on short-selling by the SEC. This is a completely idiotic policy and I will post on this. See this article, for example. Banning short-selling to stop a financial crisis is like banning reporters when a war is going bad. Attack the messenger. The short-sellers were not responsible for the toxic debt. But those responsible prefer to blame the short-sellers to deflect attention on themselves.


Gopal said...

Senator Dodd, among others, is apparently working on a bill to increase the regulation of companies in the financial sector that opt for government assistance. The bill will require the government to be compensated for the assistance rendered, i.e. the purchase of toxic assets of the financial services companies. The government will be given company stock that is equivalent in value to the purchased toxic assets. This will effectively give the government seats in the companies' boards.

While I am all in favor of more efficient regulation of the new Wall Street, I have some misgivings about this particular aspect of regulation. This measure, as I understand it, is a step away from the free market system and towards communism. I am curious to see where the new regulations will take the economy (if they are passed by the Congress and not vetoed by the President, that is).

Any comments, Prof. Ickes?

Barry W. Ickes said...

This intervention is surely a big step, and it is a significant change. But I would not call it a step towards communism. We are not abolishing private property or preventing markets from allocating resources. What we are doing, I hope, is emergency action in the wake of crisis. I think if the government puts up money in such banks it is good to take some role in governance, since excessive risk taking is what got them into trouble. But hopefully, the plans will fix things sufficiently so the government can exit from these companies as well.
But it is correct to be worried. These emergency measures are not exactly tried and true. And action in emergency situations is always risky.