Away from Wall Street, Economists Question Basis of Paulson's Plan

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Away from Wall Street, Economists Question Basis of Paulson’s Plan

The Bush administration’s pitch for a sweeping bailout of the financial system has centered on two simple premises: that the economy could suffer a crippling downturn if action is not taken very quickly and that this action should consist of the government buying troubled mortgage securities from banks and other institutions.

But many of the nation’s top economists disagree with one or both of those ideas, even as many top political leaders have swung behind them.
Wall Street economists have mostly endorsed Treasury Secretary Henry M. Paulson Jr.'s plan, or a variation thereof.

But almost 200 academic economists – who aren’t paid by the institutions that could directly benefit from the plan but who also may not have recent practical experience in the markets – have signed a petition organized by a University of Chicago professor objecting to the plan on the grounds that it could create perverse incentives, that it is too vague and that its long-run effects are unclear. Sen. Richard C. Shelby (Ala.), ranking Republican on the Budget Committee, brandished that letter yesterday afternoon as he explained his opposition to the bailout outside a bipartisan summit at the White House. The petition did not advocate any specific plan, including that offered yesterday by House Republicans.

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The critics can be roughly divided into two camps. One group thinks money should be directly infused into banks, which should allow it to trickle down through the financial system to borrowers. A second group thinks the government should buy individual mortgages, thus helping ordinary Americans more directly, with the benefits trickling up to the banks.
The plan promoted by Paulson and Fed Chairman Ben S. Bernanke is somewhere in between: buying up packages of mortgages and hoping that the benefits spread both up to banks and down to households.

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