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Financial Crisis: The Invisible College to the Rescue

I think it was Doug Elmendorf who first effectively put pen to paper arguing that it was time for the government to invest in bank equity on a large scale--a bunch of people had said it before, but his was the first plan I had seen.

And then the Invisible College set to work:

Rescue Plan Comes Around to Views of the Academics: By JUSTIN LAHART: The government's plan to buy equity in financial institutions, announced Friday by Treasury Secretary Henry Paulson, is an idea that many academic economists have championed from the start of the crisis. Many economists believed that the heart of the government's initial plan to pay $700 billion for toxic assets was aimed at the wrong target.... They said a wiser course -- the one the Treasury now seems to have come around to -- was for government to rebuild the badly depleted cash levels on bank balance sheets.... [A]s international efforts to contain the crisis continue this weekend at meetings of the International Monetary Fund and World Bank, economists' ideas for solutions are influencing policy and entering the public discourse.

Wednesday morning, Barry Eichengreen, an economic historian at the University of California, Berkeley, sent an email to, the Internet portal of the Centre for Economic Policy Research, a European economic-research network, asking economists to submit brief essays on ways government leaders could tackle the financial crisis. By the next day, VoxEu had produced a booklet of 14 essays by 18 economists. As of Friday, when the Group of Seven finance ministers and central bankers met in Washington, the booklet had been downloaded more than 10,000 times. The economists came from different schools of thought and varying political stripes but all agreed that recapitalizing banks was a key initiative. "These are people that don't talk to each other sitting all over the world," said University of Chicago Graduate School of Business economist Anil Kashyap, one of the essayists. "Everybody arrives at the point that the capital is front and center."

The U.K. announced measures on Wednesday that included a plan for the government to offer as much as £50 billion (about $85 billion) to buy stakes in banks.... Many economists also say that governments will have to guarantee the short-term loans that banks extend to one another. This so-called interbank market has been under severe stress because banks have been too wary of what lurks on each other's balance sheets to lend to one another. That has sent rates on interbank loans sharply higher, which in turn has crimped the flow of cash throughout credit markets. Any guarantee of the interbank market would need to be only a stopgap measure, says Columbia Business School economist Charles Calomiris....

A final step toward stabilizing the economy would be a large economic stimulus plan, said Berkeley economist Brad DeLong. He suggests that in the U.S. this could be two-tiered, with half the stimulus going toward a tax rebate and the other half dedicated to infrastructure spending. Mr. DeLong said he is encouraged by how quickly economists' thoughts on the crisis have made it into the public sphere. "Everything seems good in terms of people understanding the seriousness of the problem," he said. "I'm actually remarkably optimistic."

One caveat. I don't talk to Anil Kashyap or Charlie Calomiris very often (like not in... years?). But I do read their stuff. Regularly. And I do have little Calomiris and Kashyap emulation programs running in the back of my brain 24/7.