Wednesday, October 08, 2008

Saving the Economy. From on high or from below - a bit off the sides?

From The Harvard Business School newsletter:

The model here is the "top down" response of the Reconstruction Finance Corporation of the Depression era rather than the "bottom up" strategy (involving the purchase of individual properties) of the Resolution Trust of the 1980s. The former returned 100 percent of its investment to the American public. The latter is estimated to have cost citizens about $200 billion, a sum that went to those who were more expert at determining value than the government's representatives.

The proposal would have immediate effects, but they might not be as noticeable to "Main Street" as some other proposals. Its immediate benefits would be to investors, but the long-term effect, it is assumed, would be to reverse the "doom loop" described above. For better or worse, it would be much more straightforward than the proposal on which more than one vote will be taken by the U.S. Congress this week, a proposal which is a mixture of "top down" and "bottom up" provisions, the product of a political compromise.

Some would claim that markets that were too free and not sufficiently regulated got us into this mess. That will be a topic of debate (not unlike the one that led to the creation of Sarbanes-Oxley oversight) over the coming months. But to what degree should the U.S. government take advantage of free markets to free them up when they become frozen? Can it employ the "Buffett Effect" to do so? Or is the analogy even appropriate? Should this be called a workout rather than a bailout? So many questions. So many answers. What do you think?

To read more:

Peter J. Solomon and Anders Maxwell, "It's Credit—Stupid!" available on PJ as a PDF.

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