Professors’ Opinions Split on Bailout Plan

Just as the House of Representatives was split on the wisdom of the $700 billion bailout bill, so too are Harvard’s economists, who have left their Ivory Tower perches to weigh in on a plan that would mark an unprecedented government intervention in the financial sector.

And while the bailout bill was voted down in the House on Monday, many of the University’s economists predict it will eventually succeed in some form, whether or not they think it’s a good thing.

Economics professor Jeffrey A. Miron is one of the strongest opponents of the bill—an article of his entitled “Bankruptcy, not bailout, is the right answer,” was posted on CNN.com Monday—and his free-market advocacy has attracted national attention.

Thousands of Internet voters have voiced approval of Miron’s views on the online news aggregator digg.com, and the piece won a mention on the radio show of conservative pundit Rush Limbaugh.

In the article, Miron argued that troubled financial institutions should be allowed to fail in order to protect the American taxpayer from the liability inherent in buying troubled securities, as the bailout bill proposes.

“In my view, preexistent government policies, starting with [mortgage insurer] Fannie Mae, created this situation by creating all these incentives for risky lending,” he said in a phone interview yesterday. “The bailout package doesn’t stop that. The same thing that caused the problem is still there.”

Kenneth S. Rogoff, an economics professor and a former researcher at the International Monetary Fund, took a more measured approach to criticizing the bill, saying that he was not “thrilled” by it and was worried that the stronger banks might not want to take advantage of it. But he added that failing to pass the bill would send “a message to the credit markets that Congress didn’t care.”

“It’s an imperfect compromise in an imperfect world,” he said. “This is only the first step on a long road. If the markets see that Congress is afraid to take this first step, they’re going to be very nervous.”

Since the financial turmoil reached crisis proportions several weeks ago, Rogoff’s views have appeared in The New York Times, The Washington Post, and the International Herald Tribune.

Other economists have been more supportive of the bill. Former University President Lawrence H. Summers wrote a piece for the Financial Times supporting the bailout, calling it “as necessary as the need for it was regrettable,” and “not a time for government to step back.”

Jeffrey A. Frankel, an economist at the Harvard Kennedy School, said he supported the bill after it was revised over the weekend, citing the importance of congressional oversight and a provision for taxpayers to recoup part of any gains made by the government through the trading of distressed assets.

He said Congress will likely pass some version of the bill because he said that the markets are likely to continue to decline in the coming weeks. A failure to pass the bill, Frankel said, could further injure an already-ailing economy.

“I think we’re probably going into a recession either way,” he said. “But this makes it more likely to be severe and long-lasting.”

Rogoff took a similarly grim view.

“Oh, we’re in a recession,” he said. “I’m guessing we’ll end up having a recession like the 1980s, say the worst in 25 years, not one of the milder ones we’ve had recently. I think we might be back at full steam in 2010, but full steam will probably be slower than it used to be, because our financial system is decimated.”

—Staff writer Maxwell L. Child can be reached at mchild@fas.harvard.edu.