Saturday, September 27, 2008

The Case against the Paulson Plan

Professor Robert Shimer, University of Chicago


In a letter to Greg Mankiw, Professor of Economics at Harvard, Professor Robert Shimer of the University of Chicago shines a bright light on the $700 billion financial system bailout proposed by Henry Paulson. His prescription, that financial institutions be forced to raise capital in the market to increase their liquidity, would put the onus on the institutions themselves, and not the taxpayers, to solve their crisis. Participation would need to be coerced because no individual institution has the incentive to do so acting alone, fearing that such a unilateral move would signal desperation.

Greg Mankiw's Blog: The Case against the Paulson Plan

The letter makes clear that the Paulson plan may be neither necessary nor sufficient to solve the liquidity crisis.

A collection of our posts about the US Economy can be found here. See, for example, Review of the Economic Stabilization Act of 2008 (3-Oct-08)

See also Can the Banking System Hold Water?

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