Wednesday, October 01, 2008

Many thanks 

Thanks to Ed Morrissey of Hot Air -- whose friendship is one of the greatest benefits received from the labor of blogging here the last 6 years -- for comments on my American Experiment article. Two quick notes: The idea of a "market maker of last resort" did not originate with me. For that you should read Willem Buiter from last year. Whether the concept has an earlier progenitor, I do not know. I wasn't really writing an academic piece where I did a full literature review. If anyone has, please send it to me, thanks.

Second, while I think there's a case for intervention, I don't think the Paulson plan in its original form was the right plan. Ed says the same thing:
That doesn�t necessarily mean that the legislation in front of Congress is the completely correct approach, either, although it keeps improving (except for the pork) on each successive iteration. But the government that created this mess with its coercion over a period of several years needs to act at least to remove that coercion and to stimulate a market for the products of its failure.
There are two problems in the market. One, as the article discussed, is gearing. Some of that gearing is on housing assets. But not all. You could have had CDS securities in a market with no housing bubble and still have gotten yourself in trouble. The other problem is that, particularly with banks holding riskier assets than anyone had understood, they now have much less capital than they should. George Soros is trotting around Congress with a plan that has the government providing that capital. The warrants suggested in later versions of the plan that the House shot down Monday could potentially have brought in that capital, but either way you have government ownership of banks. A successful plan, as Buiter notes today, has to have both parts. We may not get them in the same bill, though, and if not you have to hope that Congress is smart enough to pass both despite their haste to get home and campaign.

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