Wednesday, February 4, 2009

Zingales Offers Suggestions to Geithner

GSB Professor Zingales offers a few suggestions to Treasury Secretary appointee Geithner (HT Selva). Among them:
I agree that we need to fix the banking sector and we need to do it fast. But I disagree that this implies bailing out investors and bankers. Not only is this extremely costly for the taxpayers, but gets in the way of a speedy resolution. And it sows the seed of the next crisis. The current crisis is the direct consequence of the Long Term Capital Management bailout orchestrated by the Federal Reserve of New York ten years ago. It was the conviction that the Fed would always intervene to rescue traders in a liquidity squeeze that induced banks and financial institutions to leverage up to and take increasingly aggressive gambles.

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