Mark Thoma quotes Michael Spence:
The Bailout: Yea or Nay, Michael Spence: We are dealing with risk and risk reduction. No one would reasonably argue that a credit lockup of extended duration will definitely occur absent the bill. The Treasury and the Federal Reserve have been, in the view of many including me, an extraordinarily effective fire department. But the fires are becoming more frequent and more serious. The risk of a credit lockup with a huge amount of collateral damage has risen.
The bill if passed and implemented skillfully will reduce the risk substantially, but not eliminate it. The risk reduction will occur in part when the bill passes because of the intention to act and more substantially over time as the treasury and its appointed agents buy damaged, hard to value mortgage related assets injecting capital into the system. They will also be able to reset the mortgage terms, helping homeowners and avoiding an inefficient foreclosure process in some cases. Experts like Warren Buffet and Bill Gross have stated that they believe that with skillful implementation, the program could not only have the desired effect but produce a decent return on investment. This is hard for Congress and the Presidential Candidates. People are understandably angry and confused. The leadership from the Administration and the Congress and the Federal Reserve, in these very risky conditions has in my judgment been exemplary.
After Lehman, the phrase “extraordinary effective fire department” as it relates to the Treasury doesn’t quit ring true. Nor does the last sentence. Exemplary? But I hope he’s right about the substantial reduction in risk if the bailout plan is implemented.
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