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Tuesday, October 28, 2008

Where Did the Bailout Plan Originate?

I also want to know the story of what went on between the Fed and the Treasury during the development of the original bailout plan, and during subsequent revisions:

What Just Happened?, by David Warsh:  The emergency continues, a little less desperate than before. ... A number of mysteries remain.  For instance:

How deep has been the opposition between the Federal Reserve Board and the US Treasury Department these last fifteen months? Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson have presented a generally united front. But what goes on behind the scenes? What of their staffs? The sheer opacity of Paulson’s initial plan to buy and hold troubled securities, and the clumsiness with which it was presented, has yet to be explained. What was the process by which it was developed and internally reviewed?

And where did the ultimately successful plan come from, anyway? Ten days ago it appeared that it was UK Prime Minister Gordon Brown’s idea (doubtless crafted for him by Bank of England Governor Mervyn King). True enough, Brown boldly and confidently tackled his banking crisis at its root. A cartoon in the Financial Times depicted leaders of other industrial nations following him along in a cheerful dance. There followed the standard paeans to John Maynard Keyes.

But the basic blueprints Brown adopted had been drawn up in Stockholm in late 1992, when central bankers in Sweden, Norway and Finland moved swiftly to rescue their big banks after the collapse of a property bubble. The rescue succeeded, though its aftermath lingered on for four years.

What were the channels through which Swedish influence flowed to London and Washington? This is an especially interesting question because of the experience of the early 1930s, when Gustav Cassel argued without success that overly restrictive American monetary policy was making matters worse, and Gunnar Myrdal devised budgetary policies implemented by the new Social Democratic government in 1933 that spared Sweden the worst of the Great Depression.

In other words, economists of the Stockholm School implemented successful macroeconomic policies several years before John Maynard Keynes published his General Theory of Employment, Interest and Money, even if they were unable to make the case for what they were doing to the wider world. The Swedes have taken economics very seriously ever since. Would they sit on their hands at a time when the world was threatened with another serious depression? What overtures would they make instead? ...

I think there were other channels of influence as well, e.g. the wide call from economists for recapitalization likely made it easier to alter course once the the UK took the lead.

    Posted by on Tuesday, October 28, 2008 at 12:24 AM in Economics, Financial System, Policy | Permalink  TrackBack (0)  Comments (10)

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