AgentMarkets & Economy

Will Treasury’s purchase plan work?

Potential for waste, favoritism, fraud 'enormous'
Published on Oct 20, 2008

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...