Tuesday, January 20, 2009

Luigi Zingales offers Geithner/Obama some great advice

Via Greg Mankiw, Zingales says (and please read the whole thing):
To begin, you need an overall strategy. Even a mediocre strategy is better than an ad hoc approach that confuses markets and fuels the perception of playing favorites. Legendary portfolio manager David Swensen (who in 23 years transformed the $1 billion of Yale endowment into $23 billion) in reference to the government intervention in this crisis commented “the government has done it with an extreme degree of inconsistency. You almost have to be trying to do things in an incoherent and inconsistent way to end up with the huge range of ways they have come up with to address these problems.”1

One solution [to restart lending] is the one I advanced last Fall5. It requires passing a new piece of legislation introducing a new form of bankruptcy for banks, where derivative contracts are kept in place and the long term debt is swapped into equity. As Pietro Veronesi and I have shown in a recent article, such conversion will fully recapitalize the banking sector and bring down the level of risk of debt (as measured by the credit default swaps level) to pre-crisis level.6

When I proposed it in September they told me that there was not enough time.7 When I re-proposed it in October they told me that there was no chance to reconvene Congress after the election. But time has passed and the Congress has been reconvened after the election, but there has been no discussion of this alternative that can save hundreds of billions of dollars to taxpayers.

Mr Geithner, incumbent bankers and their lobbyists will always make you believe there is no alternative to the plan that benefits them the most. You cannot fall for this old trick.
The alternatives I outlined above are not only possible, but also fair. They penalize who invested poorly and help provide loans to businesses in need. On top of this, they achieve these goals at zero cost to taxpayers (no small feat in a time of ballooning deficits). Yes, we can Mr Geithner, … if you lead us there.

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