A Plan for Addressing the Financial Crisis
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CitationLucian A. Bebchuk, A Plan for Addressing the Financial Crisis, The Economists' Voice, Sept. 2008.
AbstractThis paper critiques the proposed emergency legislation for
spending $700 billion on purchasing financial firms’ troubled assets to
address the 2008 financial crisis. It also puts forward a superior
alternative for advancing the two goals of the proposed legislation –
restoring stability to the financial markets and protecting taxpayers.
I show that the proposed legislation can be redesigned to limit
greatly the cost to taxpayers while doing much better in terms of
restoring stability to the financial markets. The proposed redesign is
based on four interrelated elements:
• No overpaying for troubled assets: The Treasury’s authority to
purchase troubled assets should be limited to doing so at fair
• Addressing undercapitalization problems directly: Because the
purchase of troubled assets at fair market value may leave
financial firms severely under-capitalized, the Treasury’s
authority should be expanded to allow purchasing, again at fair
market value, new securities issued by financial institutions in
need of additional capital.
• Market-based discipline: to ensure that purchases are made at
fair market value, the Treasury should conduct them through
multi-buyer competitive processes with appropriate incentives.
• Inducing infusion of private capital: to further expand the
capital available to the financial sector, and to reduce the use of
public funds for this purpose, financial firms should be
required or induced to raise capital through right offerings to
their existing shareholders.
Compared with the Treasury’s proposed legislation, the alternative
proposal put forward in this paper would provide a far better way to
use taxpayers’ funds to address the financial crisis.
Citable link to this pagehttp://nrs.harvard.edu/urn-3:HUL.InstRepos:26356100
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