Yesterday in a comment to Breaking, Agreement Reached... (see sidebar), I posted a letter by almost 200 leading economists who criticize the bailout plan:
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
This has strengthened Republican opposition to the plan. The Washington Post covers the story with the headline, Away from Wall Street, Economists Question Basis of Paulson's Plan .
Senator Richard Shelby (R-Ala.), the leading Republcan on the Senate Banking committee was interviewd on CNN yesterday, voicing his opposition to the bailout in its present form. In the interview he brandishes to the economists letter.