30 September 2008

1 Of 200: Paola Sapienza On Her Opposition To The Paulson Plan

At this point, I don't think there's any doubt that Congress is going to pass some sort of legislation to forestall what many are calling a Modern Great Depression. To avoid letting the perfect be the enemy of the good, I'm persuaded that something must be done now in order to stave off, to the extent possible, serious socialization that would inevitably occur with a possibly Democrat controlled Congress & White House.

If the Paulson Plan or another one like it can keep us off of The Road to Serfdom, then I'm all for it.

Recently, Paola Sapienza, associate professor of finance at Northwestern, gave an interview to The Chronicle about her efforts to draft a letter, signed by 200 economists, opposing the Paulson Plan.
Q. Your petition was apparently explicitly discussed at yesterday’s White House session. And hundreds of thousands of people must have seen the footage of Richard Shelby waving it in the air. Is that more impact than you’d expected?

A. It’s quite amazing. To be honest, I didn’t know about any of this until I got calls from the press. You never know when these things are going to work. There were a lot of skeptics saying, Ah, they’re not going to listen to us. But we gave it a try because we thought there was some hope.

Q. How did the project begin?

A. A colleague, Luigi Zingales, and I were working on our own research. We just had read the Paulson plan [proposed by Treasury Secretary Henry M. Paulson Jr.], and we started to exchange comments, saying this is really bad, we’ve got to do something. And so it was just an impulsive urge to draft a letter … We went down the corridor to see if other people would contribute. Professor Anil Kashyap gave us some input. And then Bob Shimer and John Cochrane. So the five of us organized the effort.

Q. I assume the 200 signers of the petition have diverse, and probably conflicting, ideas about how to solve the crisis.

A. Very much so. We had that in mind from the beginning, that we wanted it to be very concise. Everyone agreed on the flaws of the administration plan. As for the right way to act, there is a large number of solutions out there.

Q. How fast do you believe Congress needs to act?

A. I think getting it right is very important. And I don’t feel the urgency of making a decision in the next couple of days. All of the signs that we see seem to confirm what I’m saying. Today Washington Mutual went under — but immediately, J.P. Morgan bought all of the assets, and the market received this as very good news. … At the end of the day, these firms still have some very good investments. There is some capital moving out there. Warren Buffett invested in Goldman Sachs this week. …

I’m not denying that it’s possible that the administration knows something that we don’t know about, and they want to intervene based on that. But all the other numbers — I don’t see the need for this urgency. I think it would be a huge mistake to rush.

Because there are so many potential alternatives, I think opening up the debate, holding hearings, taking some time, is the right thing and the democratic thing to do.

If you have tips, questions, comments or suggestions, email me at lybberty@gmail.com.