Paulson Plan `Social Democracy at Its Worst'

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Meltzer Calls Paulson Plan `Social Democracy at Its Worst'
By Bob Willis

Sept. 19 (Bloomberg) -- Federal Reserve historian Allan Meltzer said U.S. government efforts to cleanse financial institutions of troubled loans shouldn't be financed by taxpayers.

``I certainly don't think this is the taxpayers' problem,'' said Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh. ``This is not a place exactly with a great big surplus that can afford to do these things. This is social democracy at its worst.''

The 80-year-old economist spoke in an interview after Treasury Secretary Henry Paulson said in Washington that proposed measures to rid banks of troubled assets and shore up financial institutions would cost ``hundreds of billions.''

``If they remove financial losses from the financial institution,'' the government should ensure that ``the financial company will still owe the money,'' he said. ``Civilized countries like Chile do that.''

Paulson told a press conference that economic policy makers would meet with congressional leaders over the weekend to prepare a program to remove ``illiquid assets'' from banks' books, while ``including features that protect the taxpayer to the maximum extent possible.''

The proposal is a recognition that earlier efforts failed to revive financial and housing markets. The government took over American International Group Inc., Fannie Mae and Freddie Mac in the past 12 days, a period when Lehman Brothers Holdings Inc. filed for bankruptcy and Americans pulled a record $89 billion from money-market funds.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net