Following the recent economic uproar, the whole of the online news-media is wondering just what exactly the government plans to do to recapitalize our financial system. There are discrepancies among what role the government should take and how it should implement itself. Without a doubt something has to be done to stimulate the global economy and quickly.
Perhaps Congress should start reading up on popular blogs, as it seems that many astute individuals have taken to commenting on the economic situation and providing their own solutions. Greg Mankiw, a professor of economics at Harvard, offers a solution to recapitalizing the financial system. His blog is intended to be a casual source of financial opinions and information (to keep in touch with his economic students), but it seems that Greg’s ideas could be put to more use.
His entry “How to Recapitalize the Financial System” briefly acknowledges the nature of our crisis. Unlike certain politicians, he does not attempt to point a finger at the cause of our situation, and immediately recognizes the need for a solution. This is generally accepted to be an injection of liquidity and recapitalization. Mankiw tries to reconcile the different approaches that economists have suggested in solving the crisis.
His hypothetical plan serves as a “How-to” guide to replenishing our economy’s capital, without all the nasty side-effects of other solutions. If a bank gains private capital, the government provides an equal amount of public capital. Think of it like the way your parents matched the savings from your first job so you could buy a car. This governmental “piggybacking” eliminates three problems according to Mankiw:
The private sector rather than the government would weed out the zombie firms. The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control.
This does seem to be more farsighted than the initial bailout and gets around the snags of plans now being discussed in Congress.
The current plan, proposed by Treasury Secretary Henry Paulson, is described in an editorial from The New York Times. The government would do all the initial injecting of capital into financial institutions, so that private investors would be more likely to follow suit. The Times seems to agree with what has been called the “socialist” approach to fixing our economy. They claim that since our markets have failed in providing for the public interest, the government must assert its interest.
Prior to Wednesday, Oct. 8 a so-called socialist implementation was not being considered, but Paulson had apparently taken an about-face since then. The editors exhibit signs of relief following this turn, showing their support for this new approach. And who is to say that a strictly regulatory approach isn’t the best one? It worked for our northern friends. Greg’s blog does point out problems with strict governmental regulation. For example, what happens when taxpayer money is placed into “zombie” banks? Should we risk more of this money on banks that had no chance of recovering? But then again, any solution is going to have risks associated with it. It just depends on where these risks will lie.
Also, as pointed out by Ron Paul, how can the government recapitalize when it has no savings left? Won’t paying debt with more debt just dig us a deeper hole for the future? That’s what he seems to assert in his interview with Fox Business. In contrast with The New York Times, Ron Paul is strictly against the socialization of our financial system. He argues that the current panicked solutions are worsening the situation and undermining our monetary system. The internationalization of upcoming congressional meetings could result in a central world bank, he fears. His argument tells us what we should not be doing more than offering a solution.
Yet he realizes the mistakes of the Depression in forming his argument, something that he says politicians are overlooking. Housing prices should be brought down, not kept high like they are currently. Keeping them up will only discourage home buying and keep much needed capital out.
Regardless of the approach these resources agree that something needs to be done to stimulate our economy.
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