While Washington may be cautiously celebrating last week’s narrow aversion of economic disaster, economists at Columbia continue to be skeptical of the recently passed bailout legislation.
Economics professors and experts expressed doubts about the plan, which some saw as a temporary solution to a long term problem—even as others have been involved in its creation.
Perry Mehrling, a professor of economics at Barnard who is on leave for the year, took matters into his own hands when he helped develop an alternative to the bailout plan that he hoped would save taxpayer money. Written with Boston University economist Laurence Kotlikoff, the proposal would allow troubled assets to be insured with premiums instead of requiring the government to buy them. The proposal was first incorporated into a bailout bill in the form of Section 102, which created an authority for troubled asset insurance. That bill was defeated in the House on Sept. 29, but when a revised bailout bill passed recently, Section 102 remained on it. That portion of the bailout requires the Secretary of the Treasury to establish a guarantee on troubled assets.
“There was never much floor debate about it, so the press hasn’t really noticed this,” Mehrling said of the guarantee clause. “But it is there and it is complete authority to do exactly what I think needs to be done. ... In the short run it looks like they’re not going to use this provision very much, but I think that they’ll discover in the long run that they’ll want to use this provision a lot.”
Mehrling’s plan garnered support across the aisle, and he hopes that the Treasury will use that authority to actually insure assets. He plans to bring a more detailed version of the plan to England, in hopes that it will help combat the worsening economic situation in Europe.
Saskia Sassen, Robert S. Lynd professor of sociology, recommended further building on infrastructure to create jobs.
“I did not like the bailout option,” Sassen said. “Our households do not need more borrowing from financial firms, they need incomes.”
For economics professor David Weiman, government action was necessary, but the bailout plan that passed was not ideal.
“It really puts a lot of the burden on the part of the government,” Weiman said, explaining that the Treasury would be left buying these risky securities. “We’re basically asking the government to underwrite the losses.”
Weiman didn’t know the details of plans like Mehrling’s, but he underlined the difficulties in selling insurance on assets, as it is more difficult to tabulate empirical benefits and risks than it is in many other purchasing decisions.
“It’s not like when I buy life insurance,” Weiman said.
A handful of Columbia professors signed a letter to Congress in late September, warning of the possible dangers in the proposed bailout plan. The letter garnered over 160 signatures from economists tied to a variety of universities across the nation.
“It’s horrible, but there was little alternative given to the people who proposed it,” economics professor Brendan O’Flaherty said. “When you’re in a plane that’s crashing and the pilot gives you instructions that were terrible, you follow them.”
Joy Resmovits contributed to this article.
alix.pianin@columbiaspectator.com
