On Oct. 1, two days before Congress approved the $700 billion bailout bill, several Harvard Law School professors came together in a panel discussion moderated by Dean Elena Kagan '86 about the current economic crisis and the government's plan for a bailout. Professors Lucian Bebchuk LL.M. '80 S.J.D. '84, Howell Jackson '82, Hal Scott and Elizabeth Warren were on the panel.
Though all panelists had concerns with portions of the bill, all but Warren said some version of the latest bailout plan should be passed.
"If this bill fails, it will be a crisis in confidence about the United States," said Scott. "The entire world is looking at us right now, and every world leader is supporting that we take this action."
Bebchuk—concerned about overpaying for assets (as he believes was the case in the government's recent bailout of Bear Stearns)—proposed that the funds authorized under the bill be divided among different managers, who would receive a portion of the profit they earn on their funds. He detailed his proposal in a recent white paper.
Jackson began the discussion by offering a historical perspective on the crisis, referencing the savings and loan crisis of the 1980s, when the federal government spent $160 billion ($465 billion in today's dollars) to rescue failing savings and loan companies. He noted one of the innovations that came out of that crisis was the financing of mortgages through capital markets, rather than by financial institutions, which started the process of securitization.
Warren dated the current crisis to the end of the 1970s and the beginning of the 1980s, which, she said, was the time when usury laws were disposed of and loans were deregulated. One of the effects of deregulation, she said, was the increased role of mortgage originators who produced "tricks and traps" mortgages, with adjustable rates and teaser interest rates. The explosion of these instruments, which shifted the risks from banks to homes, was a key reason for the current crisis, said Warren.