Glenn Hubbard on the Paulson Plan

in today's WSJ:

Any solution should observe three guiding principles: It should (1) restore the stability of the financial system quickly and at the lowest possible cost to the taxpayer; (2) punish those who are responsible for losses; and (3) address the root cause of the crisis -- the price collapse in the residential real-estate market. In doing so, the solution should respect the rule of law by spelling out the proposal in sufficient detail for the Congress and the electorate to pass judgment. To the extent possible, it should follow proven precedents.

The administration's current proposal fails to meet these principles. The Treasury's plan has three significant problems:

First, there is the central issue of how to price the assets ...

A second issue is whether we are better served by buying assets or institutions ...

The final problem is potential cost ...

Efficient institutional design can reduce the share of costs borne by taxpayers, while repairing the financial system's ability to match borrowers and lenders and provide risk-sharing, liquidity and information services. Keeping costs down is important, as such a large increase in taxpayer support will constrain significantly, if not overwhelmingly, the fiscal initiatives of the next president.

UPDATE: Please watch Senator Dodd like a hawk:

As Senator Chris Dodd's Banking Committee Web site explains it, "The only way to really help homeowners keep their homes is to allow borrowers to get the mortgages on their first homes reduced to the market value of those homes through bankruptcy." This may sound like a great idea to troubled borrowers, but since taxpayers are increasingly now the lenders in these transactions, it will simply increase the cost of Mr. Paulson's plan.