A proposed $700 billion buyout to stabilize Wall Street may be the best solution for the U.S. financial crisis, but better oversight of the plan and smarter market regulation are necessary to correct the situation, according to ASU professors.
The proposed Wall Street rescue plan — put forth by Treasury Secretary Henry Paulson, Jr. and backed by the White House— aims to buy up troubled assets, like devalued mortgages, to get the economy back on track, according to the White House Web site.
A key part of the proposal involves encouraging lending, as many banks are currently reluctant to lend. The plan is currently being debated as Congress prepares to vote.
Anthony Sanders, a W. P. Carey School of Business professor of finance and real estate, said the current market problems could escalate out of control if the government does not take action.
Potential consequences of government inaction include the “systemic meltdown of financial institutions and the stock market,” he said.
“In general, it’s a terrible idea to bail out financial institutions that knowingly took risks and lost,” Sanders said.
But he said a free market solution is unlikely. The plan will probably give a much-needed boost to the housing market, he said.
“If I’m a betting man, I would say it will stimulate the housing market,” he said.
Sanders said better regulation is necessary, comparing the economy to a football game that needs referees to ensure fair play.
But the referees should not decide who wins, he said.
“The bad news is government regulation got us here in the first place,” Sanders said.
Calling the intervention a bailout is misleading, he said, because the government is investing money that will likely pay off, if the plan works.
It is also probable, Paulson has some kind of guarantees that the $700 billion buyout will cause banks to increase lending, Sanders said.
“I would be surprised if Paulson hasn’t talked to major banks and gotten some indication they will start lending,” he said.
W. P. Carey School Regents Professor of Economics and Nobel Laureate Edward Prescott said in an e-mail, there is not much of a crisis on Wall Street and a government bailout will end up costing taxpayers little in the long term.
“There is a sound financial system and there is no need to rescue,” said Prescott, who won the 2004 Nobel Prize in Economic Sciences. “Current economic conditions are good.”
Over the past five quarters, the annualized growth rate of the U.S. was increasing at a healthy rate of nearly 3 percent, Prescott said, and the country’s economy was performing better than Western European countries or Japan.
The bailout plan also represents an enormous shift in philosophy from the White House’s typically pro-free market solutions, said John Cesta, a W. P. Carey School professor who specializes in corporate finance.
Cesta said he is bothered by the plan’s lack of oversight and accountability, which gives unprecedented power to the Treasury Secretary. He said the plan represents a “power grab” on the part of Paulson.
While the government has warned urgent intervention is required, Cesta said he estimates there is at least about a week to go before the government must act to avert an even more severe crisis.
“They want free reign over $700 billion of taxpayer’s money,” Cesta said of the Federal Reserve. “They’re pretty much saying, ‘We have to do it [now], and we have to do it our way.’”
Reach the reporter at matt.culbertson@asu.edu.
