Wednesday, September 24, 2008

And, the Rebuttal

. Wednesday, September 24, 2008

Americans don't like the idea of our tax dollars going to bailout a bunch of companies run by massively rich executives.  Chris Dodd's plan is a reflection of the American voters' affinity for fairness (and punitive measures).  While fairness is a laudable goal, it isn't always the best guide for policy creation, and here's why:

At the heart of Dodd's proposal is the belief that taxpayers will invest too much in this bailout to be satisfied with assuming all of the risky debt with none of the potential upside that equity ownership conveys.  I'd first like to remind readers that there is an entire (profitable) industry that buys bad debt at reduced rates and then finds ways to cajole debtors into paying back that debt - ever heard of a collection agency?  Now, I'm not suggesting that the government start making harassing calls to debtors, but I am pointing out that you can make lots of money by buying bad debt obligations.

More importantly is that critics of Paulson's plan fail to recognize all the positive externalities that this bailout will afford.  Those externalities (basically, the propping up of the economy which keeps jobs from being cut, keeps pensions and retirement savings accounts secure, keeps access to credit relatively cheap) will provide taxpayers much more economic gains then equity positions in the finance industry could ever afford. And we can access those external gains without all the headaches of legislating the terms of a government equity position (how much equity?, what type of voting rights?, when can the government sell its holdings?, potential for increased lobbying from companies in which the government is invested? etc.).

The reason why Wall Street needs bailing out is because the market cannot adequately and independently self-correct due to a preponderance of externalities.  That is why the government needs to step in - because the government doesn't have a free-rider incentive and the government has the clout and the capital to actually get something done.  It would be a mistake to limit the government to behavior of firms - because the government's ability to bolster the economy at this point comes directly from its ability to NOT act like a firm.

Of course, I am not without criticism of Paulson's plan (I'm a grad student for God's sake, it's my job to criticize everything as much as humanly possible), but I'll save those criticism for another post - I'm well beyond my 50 word limit.

Will - tell me why I'm wrong . . . .


And, the Rebuttal
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