Paulson’s Plan Was Not a True Solution to the Crisis

World creditors came to a sudden conclusion – that US deficit spending at the household and government levels is highly dangerous and unsustainable – and as a result hang on tight to any money they hold. Spending and lending has slowed drastically. Major institutions – lending agencies, investment banks, insurance firms – have come close to folding, and the Bush administration has reversed all previous positions, arguing that huge, fast government intervention is needed to rescue both the US and global economy. Financial Times columnist Martin Wolf argues that a viable plan must meet three criteria: deal with the systemic threat, create good rather then risky incentives, and minimize costs for taxpayers, while being “consistent with ideas of social justice.” The plan, by rewarding the irresponsible, does not meet those criteria, Wolf suggests. Giving value to “junk” assets only extends the pain and allows it to spread to normally safe banks, funds and communities. Instead, banks, agencies and individuals must recapitalize and build safety nets, which requires time. A fast solution that substantially adds to US debt can only prolong the problems. – YaleGlobal