“Good banks, bad banks… doesn’t matter. What we need is new banks.”

Buiter’s idea to create new banks with bailout funds, seconded by Paul Romer and discussed by David Warsh is endorsed by uber-entrepreneur Marc Andreessen in this great video:

My better half, The Real Scientist, tells me that I should learn to compromise and my analysis should be conditioned on the fact that politicians will feel the need “to do something”. So getting angry about the mess they make (e.g. the disincentive to work created by the mortgage bail-out) when doing nothing would be optimal is like cursing the sun for rising in the morning. If the government feels the need to spend a ton of money fixing the banking system, investing in new banks is a good way to spend that money.

PS – No really. I’m off blogging for the rest of the week.

3 thoughts on ““Good banks, bad banks… doesn’t matter. What we need is new banks.””

  1. I see you really jumped on the Mulligan bandwagon re: mortgage modification labor supply incentives.

    I’m skeptical. Sure, it’s almost tautological that some people are marginal w.r.t. labor market participation but since more people, even lower skilled, have “careers” and a job is a complex long-term contract and not a spot market transaction, most people are inframarginal.

    That, combined with the fact that people pretty much don’t get to choose hours, I wouldn’t see this effect, real and all, as a major factor in the story of these events.

  2. You’re suggesting macro labor supply curves are inelastic? That’s not really an issue since we’re talking about shifts in the supply curve. Its also not true.

    You don’t think sectoral shifts are playing a role in this recession? If you do and you also think labor rigidities aren’t playing a role, then how do sectoral shifts matter? capital reallocation problems?

    I agree that the mortgage story may be quantitatively insignificant, but saying labor supply is inelastic doesn’t really prove the point.

  3. The shape and place of the labor supply curve is determined by preferences and intertemporal concerns. My point was that I find it implausible to account for large movements in and out of unemployment by labor supply shifts of any kind. Labor market participation… sounds more like it, but if we think there’s something to the adjective “involuntary” we will insist that they’re different phenomena.

    Sectoral shifts are a demand phenomenon, no? The main reason why you change sector (and grudgingly start anew w.r.t. human capital relevant to that sector) is if you got fired and your old sector is not hiring.

    Actually, I am being stupid because in an equilibrium everything exogenous will determine everything endogenous so I’m not sure what it means for this to be explained by labor supply shifts.

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