The Treasury announced a plan this week to recapitalize banks with $250 billion. Responding in the Wall Street Journal (“A Thumbs Up From the Ivory Tower” on Oct. 13) Prof. Charles Calomiris said:

These parts are the right move, and as you know, many economists including myself have been calling for them for weeks. But the other aspects of TARP will likely be a mess to implement, especially asset purchases and asset work outs, and I predict that we will regret the stubborn insistence of the Treasury to waste resources on these plans that could be so much better put to use as capital injections.

Prof. Frank Lichtenberg spoke with the Financial Post about the thawing of the credit markets:

I think direct investment in banks is likely to unfreeze the credit markets more than the purchase of bad loans from these companies. The policies have not been fully implemented and we’ve already seen some evidence of an increase in interbank lending and a reduction in interest rates.

Dean Glenn Hubbard, writing with Princeton’s Alan S. Blinder, addressed the Treasury’s plan to broaden of deposit insurance coverage in the Wall Street Journal (“Blanket Deposit Insurance Is A Bad Idea” on Oct. 15). They wrote:

We might wind up worsening an odd sort of beggar-thy-neighbor game, causing a “giant sucking sound” as deposits fled other countries for the sanctuary of the U.S. and its FDIC. The implications for our international friends could be enormous. In a misguided attempt to create financial security at home, we might inadvertently make the world a significantly more dangerous place to live.

Memo to Washington: Take a deep breath and ask, “What is the problem that unlimited deposit insurance is meant to solve?”

It is not people lining up to take their money out of banks. There appears to be little banking panic among retail customers. It’s true that banks are not lending, but not because they lack deposits. At bottom, they are not lending to customers because their capital bases are weak and because they are not lending to one another. Banks are not lending to one another because faith in their counterparties has evaporated. So rather than risk loss, they just sit on their hands.

Speaking on National Public Radio’s On Point program on Oct. 14, Prof. Frederic Mishkin discussed the global perspective and the cost in reputation to the U.S. economic model. He said:

[The United States’] soft power has been weakened, but in the long term, the basic model of capitalism, but not laissez faire, and good regulation will be the keys to the success of the United States. Sometimes we have had too much deregulation and if re-regulation is done right, the US model will be the dominant one.

Photo credit: Phil Dokas