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Unformatted text preview: -1-Economists Voice www.bepress.com/evOctober, 2008 The Berkeley Electronic PressWe Arent Done Yet: Comments on the Financial Crises and BailoutJOSEPH E. STIGLITZIt doesnt take a genius to fgure out that our fnancial system is in a mess, and that something needs to be done. As I write, the House oF Representatives has just re-jected HR 3997 which modifed Treasury Secretary Paulsons bailout proposal oF September 20, 2008. It appears that adding 100-odd pages was not suFfcient to make the plan popular. Paulson and Wall Street have urged quick passage to restore confdence. But will it do so, iF some Future modifcation survives Congres-sional scrutiny? One problem is that there is a widespread view, at least partially correct, that Wall Street is trying to put over another conf-dence trick on the American people, and iF it Fails to resotre our fnancial system to healthand there is more than a reasonable chance that it will not succeedthat Failure will Further erode confdence both in Wall Street and in the ed and Treasurys ability to deal with the problems. IF it does work, it will most likely be because Paulson and his crew have managed to pull a confdence trick on the American taxpayer.THEBAILOUTPROPOSALSFLAWSThere are three critical aws in the proposal. The frst is that it reliesonce againon trickle down economics: somehow, throwing enough money at Wall Street will trickle down to the beneft oF Main Street, helping ordinary workers and homeowners. (The irony is that Wall Street was itselF destroyed in an act oFtrickle up economicsin its rush to make sure that the money it had discovered at the bottom oF the pyramid was moved to the top.) Trickle down economics almost never works, and it is no more likely to work at this time than at any other. Even iF it works, its neither the most eFfcient nor the Fairest way oF addressing the problem. The second is that it sees the Fundamental problem as a crisis oF confdence. That no doubt is partoF the problem; but the Failure oF con-fdence is because the fnancial markets made some very bad loans. Thats not just a matter oF imagination or perception. Its reality. There was a housing bubble, which supercharged our economy, and that has now burst. Best esti-mates are that house prices have a ways to Fall beFore they are back to normal. We mightbe able to stop overshooting; but that is perhaps the best we can hope For. And iF prices do con-tinue to Fall, there will be more Foreclosures. The bad loans have created a hole in banks Joseph E. Stiglitz, Professor at Columbia University, received the 2001 Nobel Prize in economics. He is the co-author, with Linda Bilmes, of The Three Trillion Dollar War: The True Costs oF the Iraq Conict.-2-Economists Voice www.bepress.com/evOctober, 2008balance sheets. That has to be repaired. If the government pays fair value for these assets, it will do nothing to repair that hole....
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