No Deal
Luigi Zingales says the Paulson Plan is a scam:
There is a better answer: Some form of debt forgiveness. If the face value of half of the debt was forgiven in exchange for some new government authority, the financial sector could be recapitalized at no cost to the taxpayers. [...] This time, an amendment would make available to companies a prepackaged bankruptcy in which debt forgiveness could be done overnight. To induce financial institutions to undergo this restructuring, the Fed could condition its provision of liquidity to the completion of the procedure. I doubt that any financial institution would choose to opt out.
If such a simple solution exists, why do we not hear about it? Easy: Wall Street would much prefer to be bailed out with taxpayers’ money than to be forced to pay for its own mistakes.
Before former investment bankers telling you that their friends in the business need $700 billion of your money.
17 Responses to “No Deal”
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September 24th, 2008 at 10:24 am
See Krugman, who is over and done with wondering why Lord Chancellor Paulson refuses to explain what it is he’s going to do and why he thinks it will work when demanding infinite authority and a free hand on a $700 billion rotating taxpayers’ credit account, and visually reminds us of Colin Powell’s dramatic performance at the UN.
September 24th, 2008 at 10:28 am
I wonder about the constitutionality of such a plan. Yes, debt forgiveness can be achieved through bankruptcy, but (right now anyway) only in the context of a proceeding in which the bankruptcy court is required to treat all creditors fairly. The idea that certain types of debt would just automatically be wiped out strikes me as problematic from a due process standpoint. I could be wrong.
September 24th, 2008 at 10:31 am
“If such a simple solution exists, why do we not hear about it? Easy: Wall Street would much prefer to be bailed out with taxpayers’ money than to be forced to pay for its own
mistakes.”
Exactly. New Deal Democrats would have seen through this in 2 seconds, lined up the public behind them, and crucified the GOP for trying to get away with this bullshit.
Now we have feeble hacks like Reid and Pelosi plus Wall Street whores like Dodd, Schumer, and Frank. They’re out for themselves. Screw the voters.
September 24th, 2008 at 10:33 am
Debt forgiveness for whom? If there is debt forgiveness, there is always a loser…and that loser will be less likely to lend money in the future. If you start to forgive debt, you’re going to decrease the incentive to lend money, which compounds the problem.
Granted this is better than just letting the system collapse…but we don’t have to do that.
Like foreign affairs, sometimes all of your options are bad ones…Paulson’s plan with Congressional oversight seems to me the least bad.
September 24th, 2008 at 11:12 am
This guy teaches at Chicago? I thought those folks believed in no free lunches. One person’s debt is another person’s asset. For many stressed financial institutions, their largest debts are your and my checking accounts. How is the government going to arrange for those debts to be forgiven? Thanks but I’ll stick with Krugman.
September 24th, 2008 at 11:52 am
This doesn’t work. Company A gets their debt forgiveness; that means all their debts to Companies B, C, D, E, and F get written off overnight. And that makes B, C, D, E, and F insolvent.
In fact this seems to be just about what happened with the Lehman bankruptcy. When Lehman went down, the markets froze as no-one knew who would be pushed over the edge by having to write down debts owed by Lehman. And that panic is why Paulson and Bernanke are now proposing a larger and wider intervention.
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