AgentMarkets & Economy

Will Treasury’s purchase plan work?

Potential for waste, favoritism, fraud 'enormous'

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This article was written the day after the House approved the revised version of the Treasury/Federal Reserve bailout plan, which had already been approved by the Senate. Much the most striking thing about the plan is that it represents a completely new approach to dealing with financial crisis. To my knowledge, no government has ever done anything like it before. That is not a conclusive argument against it if there are compelling reasons for believing that it will work. But -- and this is the stupefying part -- no such reasons have been given! A search of the Federal Reserve Board and Treasury Web sites comes up empty. The alternative is the lender-of-last-resort (LLR) approach, under which the central bank lends at a penalty interest rate to solvent firms in distress. The LLR approach, which has been used until now to deal with the crisis, has behind it a long intellectual history as well as substantial operating experience. The new approach has no intellectual foundati...