About the $700 bn proposed by the Treasury Secretary Paulson, Mexico had its own financial bail-out in late 90's, it was called FOBAPROA -now IPAB-. In essence, the plan for the U.S. lack considerable differences with mexican's. If Congress concedes the special power to Secretary Paulson, the government would back (probably buying) the "toxic" assets from bank's balance sheet.
So, what are the lessons to be learned from IPAB? First, whether using taxpayer's money to save rich's banks is right or wrong is not worth to discuss. Consider the following argument: if the government bails-out the rich's banks it should do it in order to protect the lower income population from inflation, unemployment and financial unstability. What would happen to low income families' savings if the financial crisis spreads to regional institutions? They would probably be at risk.
Second, as long as the government provides confidence to financial sector's agents a plan could be developed to profit from current dismal. Summers' approach puts it simply in macro words: the plan is not necesarly a downfall for a number of reasons, specially, because the intertemporal sum of income for the government in the medium term can be greater or equal to zero.
Third, financial institutions, just as the FED did with AIG's bail-out, should be charged with a penalty rate for the loans they get.
Fourth, the financial sector must be restablished quickly, with tougher rules, in order to start making profits for the government and pay the loans.
Certainly, even though the sum of revenue for government in a period of time could be positive, an asymetric treatment of taxpayers needs to be addressed. Lets not forget that as interest rates increase, current consumption is more expensive relative to future consumption, thus, current taxpayers are very likely to have a budget much more constrained than future ones -this is probably the exact same effect that eplains why there was a lessening on the government's deficit in the 90's.
Fortunately, governments often can make profits from those companies that bail-out, take for example airlines. Consistently, governments must save either airlines or financial institutions. The latter has some clear characterisctics of being an industry a natural monopoly, Summers mentions Mexico's bail-out in 1995. The financial sector is clearly a very particular one. Calculation of the long term profits made -in a positive scenario- for financial assets bought are, inherently, far more complicated.
It is indeed a weak spot of the $700 bn proposal that, in case of buying toxic assets, is far from clear the value at which they should be bought. Now the government could be pushing up the value of those toxic assets, increasing in the process future taxpayer's burden. Some market mechanism could be, as recently suggested, a reverse auction.
There are, indeed, a lot of voices that prevent from using taxpayers' money for buying private assets, specially toxic ones. Zingale's approach is just as comprehensive as Summers', it privileges the use of current mechanism for bankcrupcies such as Chpater 11. However costless for taxpayers this approach, it takes far more time as stress by Chicago's professor. A positive shock in confidence is a particularly strong policy in current situation, in order to restor confidence.
Now that Congress voted against the bail-out, is hard to tell whether it was an electoral decision or a unbiased one. For certain, the delay in the bail-out package would just make it more important.
So, what are the lessons to be learned from IPAB? First, whether using taxpayer's money to save rich's banks is right or wrong is not worth to discuss. Consider the following argument: if the government bails-out the rich's banks it should do it in order to protect the lower income population from inflation, unemployment and financial unstability. What would happen to low income families' savings if the financial crisis spreads to regional institutions? They would probably be at risk.
Second, as long as the government provides confidence to financial sector's agents a plan could be developed to profit from current dismal. Summers' approach puts it simply in macro words: the plan is not necesarly a downfall for a number of reasons, specially, because the intertemporal sum of income for the government in the medium term can be greater or equal to zero.
Third, financial institutions, just as the FED did with AIG's bail-out, should be charged with a penalty rate for the loans they get.
Fourth, the financial sector must be restablished quickly, with tougher rules, in order to start making profits for the government and pay the loans.
Certainly, even though the sum of revenue for government in a period of time could be positive, an asymetric treatment of taxpayers needs to be addressed. Lets not forget that as interest rates increase, current consumption is more expensive relative to future consumption, thus, current taxpayers are very likely to have a budget much more constrained than future ones -this is probably the exact same effect that eplains why there was a lessening on the government's deficit in the 90's.
Fortunately, governments often can make profits from those companies that bail-out, take for example airlines. Consistently, governments must save either airlines or financial institutions. The latter has some clear characterisctics of being an industry a natural monopoly, Summers mentions Mexico's bail-out in 1995. The financial sector is clearly a very particular one. Calculation of the long term profits made -in a positive scenario- for financial assets bought are, inherently, far more complicated.
It is indeed a weak spot of the $700 bn proposal that, in case of buying toxic assets, is far from clear the value at which they should be bought. Now the government could be pushing up the value of those toxic assets, increasing in the process future taxpayer's burden. Some market mechanism could be, as recently suggested, a reverse auction.
There are, indeed, a lot of voices that prevent from using taxpayers' money for buying private assets, specially toxic ones. Zingale's approach is just as comprehensive as Summers', it privileges the use of current mechanism for bankcrupcies such as Chpater 11. However costless for taxpayers this approach, it takes far more time as stress by Chicago's professor. A positive shock in confidence is a particularly strong policy in current situation, in order to restor confidence.
Now that Congress voted against the bail-out, is hard to tell whether it was an electoral decision or a unbiased one. For certain, the delay in the bail-out package would just make it more important.
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