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The Politico

'Taxpayer Ripoff': Many Economists Skeptical of Bailout

Avi Zenilman

Many of the same economists and opinion-makers who'd provided a bipartisan sheen of consensus to Treasury Secretary Henry Paulson's 
previous moves have quickly begun casting doubts on the wisdom of a
policy that would allow Treasury to purchase without oversight hundreds
of billions of dollars of difficult-to-price assets from financial

Under the proposal, Paulson would not have to report to Congress until
December, and the only safeguard for taxpayers was a provision that the
“Secretary shall take into consideration means for — (1) providing
stability or preventing disruption to the financial markets or banking
system; and (2) protecting the taxpayer.”

Skepticism toward the plan reflected more than the predictable desires
of the left to spread the wealth to Main Street or of the right to
reject government bailouts, although those sentiments were also

"We need to take a bold move. In that sense I think Paulson is right,"
Luigi Zingales, a Professor at the University of Chicago School of
Business who wrote a widely circulated short essay titled "Why Paulson is Wrong,” told Politico.
Zingales fears  that the Treasury bailout would effectively turn the
entire financial sector into a Government Sponsored Enterprise,
complete with the same murkiness and moral hazard that sunk Fannie Mae and Freddie Mac.
“It might achieve the final outcome, but it will do so at an enormous
cost," he said. "All the troubles we’ve seen with Fannie and Freddie
would be seen again and again across the entire financial sector."

President Bush is “asking for a huge amount of power,” said Nouriel Roubini, an economist at New York University
who was among the first to predict the crisis. “He's saying, ‘Trust me,
I'm going to do it right if you give me absolute control.' This is not
a monarchy.” (Roubini told the New York Times that despite these concerns, he also thought the plan could help stave off a recession.)

Paul Krugman, the Princeton University economist and liberal
columnist for The New York Times who had until now been cautiously
supportive of Paulson's and Federal Reserve Chairman Ben Bernanke’s
efforts to prop up the system, wrote that the new plan would be a
taxpayer rip-off. “I hate to say this, but looking at the plan as
leaked, I have to say no deal,” he wrote on his blog at 4:46 p.m.
Saturday. “Not unless Treasury explains, very clearly, why this is
supposed to work, other than through having taxpayers pay premium
prices for lousy assets.”

Yves Smith, a longtime banker and contributor to the influential
finance blog Naked Capitalism, published an angry post there titled, "Why You Should Hate The Treasury Bailout Proposal":

"Given that continuing to buy U.S.
assets will come under increasingly harsh scrutiny overseas, the U.S.
needs to bend over backwards to devise a plan that at least looks
credible in terms of directing the funds that come from taxpayers and
lenders to their highest and best uses and implementing reforms that
will restore active and prudent oversight of financial firms," she
wrote. "The administration's demand for a free pass, even if Congress
unwisely goes along, is likely to backfire with our foreign creditors."


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Gregory Mankiw, a professor at Harvard University and a former chairman of Bush's Council of Economic Advisers who was the economic guru for Mitt Romney's campaign, favorably linked to Smith's post under the headline "A Blank Check"
and approvingly quoted a correspondent who wrote, "Has more money ever
been given with fewer restrictions on how it is used? Ever?"

Sebastian Mallaby, the center-right economic columnist for The Washington Post and scholar of the modern financial system, was equally dubious. “The plan is being marketed under false pretenses," he wrote in his Sunday column, rejecting comparisons of the plan to the Resolution Trust Corporation,
which the government formed in response to the savings and loan crisis
to purchase and sell off the bad loans made by bankrupted thrifts.

“The administration proposes to buy up bad loans before the lenders go
bust,” Mallaby noted, keeping the banks alive but doing little to solve
the problem infecting the markets. “Bad loans are weighing down the
financial system precisely because private-sector experts can't
determine their worth. The government would have no better handle on
the problem.”

Justin Fox, Time magazine's
top financial writer and columnist, also worried about the lack of an
upside for the taxpayer. "What I still can't figure out is how Treasury
hopes to structure the bailout so there's at least a chance of getting
a fair return on that risk-taking," he wrote on his blog.

"How on earth will these things be priced?" Portfolio's Felix Salmon asked
about the bad debt Paulson plans to purchase. He also pointed out that
Treasury would need to stock its office with bond-trading
professionals. "All we know so far is that it's going to be set up as a
reverse auction, but that raises more questions than it answers." 

One notable proponent of the plan was The Financial Times' unsigned Lex column, which acknowledged the lack of oversight but mostly praised the plan:

"This bailout is necessary and the bill should be pushed through
quickly. … Nor is the package necessarily a disaster for the taxpayer
or the U.S. dollar. If the Treasury buys assets well, and confidence is
restored, there is [a] chance that Mr. Paulson could win fund manager
of the year."

Zingales, though, writes in "Why Paulson Is Wrong" that "For
somebody like me who believes strongly in the free market system, the
most serious risk of the current situation is that the interest of a
few financiers will undermine the fundamental workings of the
capitalist system. The time has come to save capitalism from the

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