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Top Economists Skeptical Of Administration's Pitch

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The Washington Post

Published: September 26, 2008

WASHINGTON - 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 quickly and that this 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.

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-term effects are unclear.

Economists tend to agree that the nation's economy is at risk as the flow of credit threatens to freeze. But many with a deep theoretical knowledge of finance and experience in government are skeptical of the structure of the administration's plan - and the speed with which it has been crafted.

Critics of the Bush plan 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 is a trickle-down approach from banks to Main Street," said Alan Blinder of Princeton University. "But if you reduce the flood of foreclosures and defaults" - which he would have the government do by buying loans directly and then renegotiating the terms - "it will make mortgage-backed securities worth more."

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