The Bush administration is working with Congress to fill in the details of its plan to take the bad mortgage-related debt off the books of banks and financial institutions and stabilize the financial markets.

With Congress scheduled to begin its election-year recess at the end of this week, the administration has little time to pull the plan together. While the negotiations are going on, The New York Times asked three economists to offer their thoughts about the administration’s actions.

Steven L. Schwarcz

Professor of law and business, Duke University School of Law

The proposal by the Treasury to use government money to purchase mortgage-backed securities held by financial institutions should defuse the financial crisis, but at a cost to taxpayers that unfortunately will be much higher than if the government had acted when markets first began to collapse. It is, however, along with Treasury’s Sept. 7 announcement that it will purchase securities issued by Fannie Mae and Freddie Mac, the first serious attempt by government to cure the underlying financial disease and not merely treat its symptoms.

To cure the disease, government must focus on treating the loss of confidence in the financial markets. The American International Group, Bear Stearns, Lehman and potentially other financial institutions are in trouble, not because of problems with economic fundamentals, but because of falling prices of mortgage-backed and other securities, requiring these institutions to mark their securities down to the collapsed market prices or triggering insurance obligations on these securities. That, in turn, has created a downward death spiral of collapsing prices.