Monday, March 23, 2009

And I did not even get a citation

A reader (and former staffer from my time at the CEA) emails me regarding the Treasury's plan to fix the financial system:

Props, my friend! I'm not familiar with the details of the latest Treasury proposal, but in broad outline it seems strikingly similar to the fund-matching proposal you made on your blog way back in *October*. (What took so long?)
Here is that old post of mine.

The basic idea of what Treasury is trying to do is to piggyback on the expertise of the market to try to ensure that taxpayers get a reasonable deal. In that sense, our proposals are similar. However, I was aiming at recapitalizing the banks, while Treasury is now aiming at removing toxic assets from their balance sheets. The issue of further recapitalization seems deferred until the results of the Treasury's "stress tests."

Moreover, some commentators have raised the concern that, because of the structure of the deal, the Treasury is providing its private partners a subsidy (which will, in part, be passed on to banks in the form of higher prices for those toxic assets). I don't know enough to judge how large this problem is, but it is reasonable to raise the question. Paul Krugman does a good job of explaining this point.

In other words, there are similarities between our proposals, but also differences. The devil is in the details. Or is God in the details? I can never figure out which it is, which is perhaps why this stuff is so damn confusing.