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Bailing Out Finance: How Will It End?

September 23, 2008

Writing in today’s New York Times, Safra professor of economics Jeremy C. Stein and University of Chicago economist Anil Kashyap outline the options, as they see them, for the federal government’s promised $700-billion bailout for financial firms.

Above all, the op-ed by Stein and Kashyap underscores how little is known about what form the bailout will take. Will the government simply buy distressed assets at their current value and hold them until the crisis passes and their value rises again? Will it overpay for these assets to subsidize failing firms, and thus provide them with the capital they need to stay afloat? Will it act as a “bankruptcy judge” for these firms, negotiating firms’ debt down in exchange for government assistance? Will it restructure mortgages to help troubled homeowners (a more aggressive intervention)?

“For now,” the authors write, “all we can do is make educated guesses.”

Read the full op-ed here.