Luigi Zingales on Why Paulson Is Wrong

by Liberty and Power

Luigi Zingales, Robert C. Mc Cormack Professor of Entrepreneurship and Finance at the Graduate School of Business in the University of Chicago, explains why Paulson is wrong even on the assumption that some sort of Federal government action is desirable.

"The decisions that will be made this weekend matter not just to the prospects of the U.S. economy in the year to come; they will shape the type of capitalism we will live in for the next fifty years. Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded? For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system. The time has come to save capitalism from the capitalists."

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Mark Brady - 9/23/2008

I agree, Zingales is not saying that no federal intervention is desirable. He's arguing against Paulson's plan. And I recognized that when I wrote "Zingales ... explains why Paulson is wrong even on the assumption that some sort of Federal government action is desirable."

Bill Woolsey - 9/22/2008

I didn't read Zingales as saying that no federal intervention is desirable. He said that what is needed is something like what judges do when negotiations among a bankrupt firm and its creditors are at an impass. And, further, that this must be done in an expedited fashion. I took it to mean that the current stockholders should be wiped out, the current holders of mortgage based securites should be able to recieve only partial payment on their securities, but that they should become the new stockholders of the firms. What are now well capitalized financial firms will be able to begin lending for credit worthy projects immediately.

This is a kind of radical reform of bankruptcy laws. Whether this counts as a new federal intervention exactly may be subject to debate.

William Marina - 9/22/2008

I would substitute the term "Corporatists" for the last word in the quote, "capitalists."