Financial Crisis: Economics Professor Perry Mehrling Co-Authors Alternative Proposal to $700B Bailout Plan
10.01.08
Perry Mehrling, Professor of Economics
As the world wonders “What now?” after Congress’ rejection of the $700 billion financial bailout plan proposed by the Bush administration and top Congressional leaders, an alternative plan proposed by Barnard economics professor Perry Mehrling and Boston University economist Laurence Kotlikoff continues to garner significant attention from lawmakers and economists alike.
The main thrust of the KM plan, as it is known, is that the federal government should sell default insurance to struggling banks to backstop their holdings of questionable mortgage securities rather than buying the troubled assets outright. This approach, the professors say, would quickly get the markets for toxic bonds active again, lubricate the system enough for credit to continue to flow, and cost less to, and perhaps even turn a profit for, the American taxpayer. Most importantly, it is based on market principles and holds the crippled banks accountable for their actions, which may feel better to the public than simply bailing them out, says Mehrling.
The KM plan grabbed the attention of House Republicans who introduced it on September 25. It has since drawn support from both sides of the aisle, and parts of the plan were incorporated into the revised bailout bill that was defeated by a vote of 228-205 on September 29. For example, Section 102 creates an authority for insurance of troubled assets, as well as an insurance-financing fund separate from the asset-purchasing fund established in Section 101.
As lawmakers return to the drawing board, they will surely take a second look at Mehrling and Kotlikoff's proposal, as well as other alternatives, the availability of which can only benefit and strengthen the plan of action ultimately to be determined.
MSNBC has the full text of the bailout plan (pdf) that was considered on September 29.
For more information about Professor Mehrling’s alternative plan, visit:
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