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Raghuram G. Rajan, former chief economist at the International Monetary Fund, says that the Treasury Department’s $700 billion bailout plan is flawed and argues that the private sector needs to step in and help out—or risk a mammoth public backlash.


RR: It’s better to address the capital problem directly than to do it indirectly by overpaying for assets. You really are doing two things with this purchase: You’re trying to create a market for these assets, because the market for them is dead, and you’re trying to establish prices in that market that private players can latch on to. For that, you need to do things at the market price, not some hypothetical price that the government is willing to pay. The moment you do it at that hypothetical price, you haven’t helped the other private players, who have no intention of doing the things the government is doing.
They don’t want to overpay, right? So, the whole notion of price discovery is at odds with this backdoor recapitalization.

Trying to fix CEO salaries as a quid pro quo [for participating in the bailout]. I’m all for thinking about the pattern of CEO pay and financial-sector participant pay, but there’s a competitive labor market out there. If you say, “You can’t pay more than X,” you’re going to do two things. First, you’re going to drive a lot of pay underground, and second, you’re going to make it much harder to recruit the savvy executives you need to run these firms. Rather than micromanaging CEO pay, Congress should focus on what rules we need for better corporate governance or what the regulators need to do to effect a better compensation structure.


Raghuram G. Rajan, the Eric J. Gleacher distinguished professor of finance at the University of Chicago’s Graduate School of Business, served as chief economist at the International Monetary Fund between 2003 and 2006.