Luigi Zingales recommends that the bail-out be structured closer to a bankruptcy proceeding,
As during the Great Depression and in many debt restructurings, it makes sense in the current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the financial sector. It has the benefit of being a well-tested strategy in the private sector and it leaves the taxpayers out of the picture...Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition.Aaron Edlin writes an open letter to Secretary Paulson:
Today, I read the U.S. Treasury’s humble request for the authority to spend 700 billion taxpayer-owned dollars. This taxpayer’s answer: "No."Edlin continues,
You could under this legislation pay $700 billion for "paper" having a face value of $800 billion even though the paper’s market value has sunk to $100 billion or even though the paper has no market, so long as you think the purchase promotes stability sufficiently. You could do so with no review and no appeal. I suppose, taking the words of your legislation literally, you could spend the entire $700 billion buying a single mortgage owned by Goldman Sachs if you thought such a cash injection was just the trick...Sadly, Congress is more focused on window-dressing for the bail-out than on fundamentally restructuring it to make it more effective and less costly. Yes, we need to do something to clean up the financial mess, but the bail-out is not the way to go.
And here is a disturbing thought: if the initial tab is $700 billion, is it possible you may wind up coming back for much more? Could the administration that brought us the $2 trillion dollar war bring us a $2 trillion dollar bailout?
