Sunday, August 7, 2011

What Obama SHOULD have done: Thoughts on the 2009 US bailouts

Como Obama Debería Haber Respondido a la Crisis Económica          (Francais)        (English)

En 2009, un periódico hispanohablante en Nueva York me pidió sobre mi opinión con respeto a la crisis económica emergente. Mi respuesta examina los seis aspectos mas positivos del debate sobre la respuesta a la crisis en aquel entonces. Unos meses después, lo traduje al francés para un economista en Bruselas.

Los Seis Aspectos Más Importantes Del Debate Eran:
  • Reconstrucción de infraestructura  
  • Bailout vía adquisición de acciones  
  • Reducción de impuestos para la clase media  
  • Economía verde  
  • Compra de hipotecas fracasadas   
  • Expansión del límite FDIC   
In 2009, I was asked by an NYC-based Spanish-language newspaper on my opinion regarding my opinion about the emerging financial crisis. My response examines the six most favorable aspects about the crisis-response debate which was taking place at that time. I also rewrote it in French a few months later for the benefit of an economist in Brussels.

The Six Main Issues Which Needed Attention Were:
  • Infrastructure Reconstruction
  • Acquisition of shares during Bailout Expenditures
  • Middle class tax reduction
  • Green Growth
  • Purchase of failed mortgages
  • Expansion of FDIC limit   
About the Author:
Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands. 


  1. To begin, question: Which New York Spanish-speaking newspaper were you contacted by? That's pretty cool. When am I going to read your articles in a Brussels-based newspaper?

    All of the responsibilities discussed in your paper (funding for reconstruction of infrastructure, bailouts through equity purchases, middle-class tax cuts, green growth, buyout of bad mortgages, increasing the FDIC limit) could be and should be done by entities more efficient than the federal government. In my opinion, you're not seeing the full picture.

    The Federal Reserve and Treasury overstepped their boundries with the 2009 bailouts. In 1913, Congress passed the Federal Reserve Act "to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes."

    Does the "for other purposes" blanket cover the TARP plan that enables them to purchase assets and equity from financial institutions? Technically, yes.

    However, if the Federal Reserve executed their mandate as it was meant to be run and gave Lehman a reasonable discount rate so they could borrow during their liquidity crisis, we would not have had the consumer confidence crisis and the bank runs that were seen. After Lehman declared bankruptcy, the Fed finally backed advances.

    Too little was done too late so, understandably, banks began to hold on to all of their liquidity assuming they wouldn't get advances from the Fed like Lehman. So, the commercial paper market was very dry and the Fed / Treasury had to overstep their normal mandates to correct their enormous financial mistakes for the public at huge costs.

  2. I don't think that the efficieny is actually the point. In fact, I also dont think that the private-sector is by definition more or less efficient than the federal government. What is for sure though , is that a private firm isnt responsible to voters or taxpayers.

    As for the question of boundaries, I would say that we should look at this from the point of view of Machiavelli or perhaps Confucius. By that I mean that we should suppose that if these are needs of the nation and of the people, then it should be done.

    As an alternative, what should we rather do, destroy the entire world economy in the name of the law? I think not.

    While I agree with the fed more faithfully sticking to the Lender of Last Resort, the trouble is that they got to the point where their assets actually werent worth anything. So it wasnt finally a question of liquidity, it was a question of insolvency.