On Sat, 27 Sep 2008, Doug Henwood wrote:
>> "The premise appears to be that the market is irrationally
>> pessimistic," wrote Greg Mankiw, a Harvard University economist and
>> another former Bush economic adviser, on his blog this week. "That
>> might be so. Nonetheless, one has to be at least a bit skeptical about
>> the idea that government policymakers gambling with other people's
>> money are better at judging the value of complex financial instruments
>> than are private investors gambling with their own."
>
> "Progressives" endorsing this line of thinking should step back and
> think if they really agree that markets are wiser than governments, and
> prices that emerge in a panic are rational.
I couldn't agree more. But of course Mankiw isn't a progressive; he served under Bush. I read this article more as evidence of a surprising broad agreement among academic economics across the spectrum that the approach of buying toxic securities is the wrong way to go. As Krugman put it, if Glenn Hubbard and Greg Mankiw had the same objections to the plan that he did (won't capitalize the banks, will waste lots of money almost purpose) there's something wrong.
The consensus among the more liberal wing of capitalist apologists (Krugman, Soros, Roubini, Martin Wolf) seems to be that a far more efficient approach would be for the government to capitalize the banks directly by buying preference shares in them as the RFC did in the depression.
Michael