INVESTORS WANT CLARITY BEFORE THEY TAKE RISKS
January 23, 2009
With the U.S. (and global) economy contracting at the steepest pace since 1982, we need a clear and coherent policy response rooted in a sound analysis of how we got to this dreadful place. Washington's changing explanations, ad hoc bailouts, massive special-interest spending, and references to the once-in-a-lifetime nature of this event convey a sense that policy makers do not have one, says Michael Boskin, a professor of economics at Stanford University and a senior fellow with the Hoover Institution.
What needs to be done to ease the economic and financial crisis? According to Boskin:
- The first order of business is still to recapitalize the banking system, with equity injections and a toxic-asset removal program used in the Savings and Loan crisis of the 1980s.
- The first $350 billion was not enough to repair the balance sheets of financial institutions that needed to raise $1 trillion before the height of the financial crisis (although former Treasury Secretary Henry Paulson is correct that it prevented a worse contraction of lending).
More rapid, transparent, efficient triage -- closing insolvent, nonsystemically important institutions and merging marginal ones with healthy ones -- is required. That's what eventually made our Resolution Trust Corporation solution to the savings-and-loan crisis work, along with selling the acquired assets off in large blocks. Exhorting the banks to lend -- when examiners are in their offices telling them not to -- cannot work.
Also, we should hammer out an approach consistent with FDIC resolution procedures. Include a sensible circuit breaker for the procyclical interaction of bank capital rules and mark-to-market accounting. But beware the law of unintended consequences, such as restrictions on banks causing private capital flight or foreclosure relief creating millions more delinquencies, says Boskin.
Of course there is much more work that needs to be done, but one thing is certain: Investors, workers and employers need to have a sense of where tax, spending and regulatory policy are headed, or they will postpone decisions and further weaken the economy, says Boskin.
Source: Michael Boskin, "Investors Want Clarity Before They Take Risks," Wall Street Journal, January 23, 2009.
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