September 25, 2008

A Critique of the Paulson Plan

A Plan for Addressing the Financial Crisis <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1273241>

by Lucian Bebchuk

Download Paper<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1273241>

Below please find the abstract of the paper.

Abstract: This paper critiques the proposed emergency legislation for spending $700 billion on purchasing financial firms' troubled assets to address the 2008 financial crisis. It also puts forward a superior alternative for advancing the two goals of the proposed legislation – restoring stability to the financial markets and protecting taxpayers.

I show that the proposed legislation can be redesigned to limit greatly the cost to taxpayers while doing much better in terms of restoring stability to the financial markets. The proposed redesign is based on four interrelated elements:

• No overpaying for troubled assets: The Treasury's authority to purchase troubled assets should be limited to doing so at fair market value.

• Addressing undercapitalization problems directly: Because the purchase of troubled assets at fair market value may leave financial firms severely undercapitalized, the Treasury’s authority should be expanded to allow purchasing, again at fair market value, new securities issued by financial institutions in need of additional capital.

• Market-based discipline: to ensure that purchases are made at fair market value, the Treasury should conduct them through multi-buyer competitive processes with appropriate incentives.

• Inducing infusion of private capital: to further expand the capital available for the financial sector, and to reduce the use of for public funds for this purpose, financial firms should be required or induced to raise capital through right offerings to their existing shareholders.

Compared with the proposed legislation, the alternative proposal put forward in this paper would provide a far better way to use taxpayers’ money to get the financial sector out of its current predicament.

Posted by Anupam Chander on September 25, 2008 at 08:00 AM in International Finance | Permalink | Comments (0) | TrackBack

September 24, 2008

$700,000,000,000

Maybe to better understand the magnitude of figures, we should endeavor to write them out, rather than using shorthand words. To my eye, $700,000,000,000 might seem a bit more daunting than $700 billion. That's 7 followed by 11 zeros.

Posted by Anupam Chander on September 24, 2008 at 09:50 AM in International Finance | Permalink | Comments (3) | TrackBack

September 17, 2008

Comparing 2008 to 1997/98 Asian Financial Crises

Link: Abroad, Bailout Is Seen as a Free Market Detour - NYTimes.com.

In parts of Asia, the bailouts stirred bitter memories of the different approach the United States and the International Monetary Fund adopted during the economic crises there a decade ago.

When the I.M.F. pledged $20 billion to help South Korea survive the Asian financial crisis of the late 1990s, one of the conditions it imposed was that the Korean government allow ailing banks and other companies to collapse rather than bail them out, recalled Yung Chul Park, a professor of economics at Korea University in Seoul, who was deeply involved in the negotiations with the I.M.F.

While Mr. Park says the current crisis is different — it is global rather than limited to one region — “Washington is following a different script this time.”

“I understand why they do it,” he added. “But they’ve lost credibility to some extent in pushing for opening up overseas markets to foreign competition and liberalizing economies.”

Posted by Anupam Chander on September 17, 2008 at 10:02 PM in International Finance | Permalink | Comments (1) | TrackBack

September 11, 2008

The global journey of a metal part--North Carolina to Italy, back to U.S., and then exported yet again

The globalization of industries, which rely on production networks that often stretch across borders, means that products often ping-pong among countries, getting counted as exports, imports and exports again at various stages.

Global Journey

A good example is the global journey that occurs when Cyril Bath Co., a small aerospace manufacturer in Monroe, N.C., just outside Charlotte, exports roughly shaped metal ribs for framing the shells of airplanes to a factory in Italy. The Italian plant machines them into finished metal forms, which it ships back to Charleston, S.C., where they are used to build sections of fuselage. Those sections are then flown to Boeing factories in the Pacific Northwest for final assembly. After all that, many of the finished planes are sold for export.

Posted by Anupam Chander on September 11, 2008 at 07:52 AM in Globalization | Permalink | Comments (0) | TrackBack