Sandro Brusco, 21 October 2008

The Paulson plan envisages that the US Treasury will purchase financial assets held by distressed financial institutions for which there is currently no market. In order to set a price for these toxic assets, reverse auctions have been proposed. As this column explains, one has to be very careful in designing these auctions in the presence of asymmetric information.

Riccardo Cesari, 18 October 2008

This column argues that current bailout plans do not address the roots of the crisis. It advocates a significant re-regulation of financial markets and assistance to households unable to manage their real estate debt.

Avinash Persaud, 06 October 2008

The liabilities of the biggest US bank equal half the US tax revenues; the ratios in Europe are bigger. Deutsche Bank’s liabilities are one and a half times Germany’s annual tax revenue; Barclays' are twice Britain’s. This crisis will either leave European financial integration in tatters or quicken the development of European fiscal capacity. European integration is a historical process that routinely stumbles upon crises that threaten to destroy it, only to find that it has been deepened by the crisis.

Howard Rosenthal, Erik Berglöf, 02 October 2008

European politicians have been quick to proclaim the bankruptcy of the US model of capitalism “as we know it”. But, this column explains, all this hyperbole is premature. In fact, the US system of today is the outcome of numerous similar interventions and offers further pause for Europe.

Daniel Gros, Stefano Micossi, 30 September 2008

Europe’s largest banks are highly leveraged and thus vulnerable, as Fortis showed. But some of these banks are both too large to fail and too big to be rescued by a single government. The EU should: (1) urgently pass legislation to cover banks with significant cross-border presence and empower the ECB to provide direct support, and (2) create an EU-level rescue fund managed by an existing institution like the European Investment Bank.

Barry Eichengreen, 28 September 2008

The Paulson Plan, whatever its final form, will not end the crisis quickly. Unemployment will rise but will the most serious credit crisis since the Great Depression bring about a new depression? Here one of the world’s leading economic historians identifies the relevant Great-Depression lessons. We won’t see 25% unemployment as in the 1930s, but double digits are not out of the question.

Avinash Persaud, 27 September 2008

This column suggests that TARP is the wrong solution, but it might buy time to develop a better plan. Such a plan could involve a private debt-for-equity swap with the government co-investing in the equity. This would put tax payers in hock for something like $70bn rather than $700bn. Managers and shareholders would take the biggest hit, but bond holders would share the pain.

Daniel Gros, 27 September 2008

How much are the toxic assets worth? A bit of logic and a straightforward application of the Black-Scholes formula suggests that if current expectations of house price declines are right, securities built on subprime mortgages might be close to worthless. The key is that US mortgages are ‘no recourse’ loans, i.e. debtors can walk away from the mortgage without being held personally liable, a feature that gives homeowners a virtual put option.

Luigi Spaventa, 26 September 2008

Bernanke and Paulson's Troubled Assets Relief Program (TARP) is not perfect, but it is a good start. Both aspects of the problem – assets’ illiquidity and shortage of capital – should be addressed in sequence. By removing troubled assets from the banks’ books, TARP would remove uncertainty. This will encourage private injections of capital and provide better information for public intervention if they prove necessary.

Willem Buiter, 25 September 2008

The Paulson Plan addresses market illiquidity for toxic assets but the real problem is a lack of bank capital and the risk of widespread insolvency. Fixing this requires a government injection of new bank capital or a forced conversion of bank debt into equity. This column argues against the former as it would further socialise the US financial system. The Package needs some work, but Congress must stop its infantile posturing and act soon.

Jeffrey Frankel, 23 September 2008

Here one of the world’s leading international economists, a former member of Clinton’s Council of Economic Advisors, comments on the growing consensus that the Paulson Plan has got the wrong end of the stick.

Barry Eichengreen, 23 September 2008

The crisis solution depends upon its causes. Here one of the world’s leading international macroeconomists explains how the world got into this mess. This is the ‘Director’s cut’ of his 18 September 2008 column on Project Syndicate.

Charles Calomiris, 22 September 2008

This column, posted 19 September on an FT forum, suggests a better way of ending the financial crisis. Instead of buying toxic assets, the US government should buy preferred stock capital in ailing banks that could raise matching private sector equity. This would avoid the intractable problems of how the government should value the toxic assets and directly address the banks' immediate problem – a lack of bank capital.

Charles Wyplosz, 22 September 2008

The world’s bankers created a reckless mix of lending and securitisation that exploded in their faces last year; they’ve stonewalled since. It would be criminal to bail them out, but spilling blood for its own sake is foolish. Here one of the world’s leading macroeconomists explains how the ‘Paulson Package’, history’s largest bet, might work and might not cost taxpayers too much. It’s too early to know which label to apply: “bailout” or “shrewd cleansing operation”.

Luigi Zingales, 21 September 2008

This weekend’s decisions will shape the type of capitalism we live with for the next fifty years. Here one of the world’s leading financial scholars, Chicago Business School Professor Luigi Zingales, argues that bailing out the financial system with taxpayers’ money is wrong. He discusses an alternative – forced debt-for-equity swap or debt-forgiveness.


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