A friend asked me my thoughts about the bailout package, and I wrote an email book. Then it occurred to me I could post it!
With an extraordinarily complicated problem, it's difficult to express anything in a not-complicated kind of way, or even to come down firmly on one side or another.
But if prodded, I think I come down more firmly than many economists on the side of pro-bailout. It's not crystal clear exactly how deep the problems go with banks and other financial institutions, but I think it's likely right that the nation is facing a once-in-a-century type of financial crisis --- that demands public intervention.
The main argument against the Paulson plan is that it will put taxpayers' money on the line without necessarily undoing or rooting out the bad choices that got us into this mess. I think that's right, but I also think that can be done later, once the crisis has passed. Quickly cutting out the dead wood requires either public ownership of firms, which Republicans would never agree to, or allowing firms to fail, which would destroy the ability of banks to lend to anyone, a collapse of financial markets altogether. Many of us would lose our jobs, and although it wouldn't be permanent, it would be far more costly and painful than lending about $2,333 per person ($700 billion spread over 300 million people) to the markets via the Treasury --- money that we could be paid back, although it's uncertain.
What's been interesting to me is that academic economists have been deeply split on the bailout plan, because it has included basically no structural details. Economists hate the idea of throwing good money after bad, of not structuring something optimally. I'm leery of it too, but I'm dubious that this is the right time to be arguing over details.
