Dear Mr. President

Third, I would advise the next president not to equate the current financial turmoil with the onset of another Great Depression. Yes, credit markets matter: firms need ready funds, banks need to trust each other, and investors need the confidence on which all capital markets depend. But that's why we have a central bank, and that's why the Federal Reserve—along with the Treasury Department and central banks around the world—has taken its extraordinary measures. This is what lenders of last resort are supposed to do. Let them do their job. The real economy will survive this episode.

One final note: we expect too much of our presidents when it comes to the economy, and they are often too happy to oblige that expectation. The American people don't need a president to manage their business but rather to manage the rules. Here's hoping for a steady hand.

Eric Maskin has been a professor of social science at the Institute for Advanced Study in Princeton, N.J., since 2000. He was awarded the Nobel Prize in 2007 for his work on mechanism design theory.
I'd advise the next president to learn to distinguish between markets that do not call for government intervention and those that do. Many markets work best with little or no outside interference. But others—especially those subject to big "externalities"—need a helping hand. The credit market is in this second category.

When a bank calls in a loan, it obviously hurts the customer in question. But it also adversely affects other banks that have lent to this borrower. They are now less likely to be repaid, and so can't as readily lend to their own customers. We say the original bank exerts an externality—a secondary effect that it doesn't take account of—on these other banks. As long as everyone continues lending, all is well. But if some banks stop doing so—perhaps because a number of customers have defaulted—they may force other banks to call in their loans, too. The chain reaction so generated could end up paralyzing the credit market altogether. Sound familiar?

Yet, government can save the day. By infusing money into some banks, it allows them to begin lending again. With a big enough infusion, the chain reaction reverses, and ultimately the market is restored to health—at which point the government presumably gets its investment back.

Such intervention comes, however, with an attendant risk. If banks anticipate government will come to the rescue should the credit market go badly awry, they may make loans that would otherwise be imprudent, e.g. subprime loans with little prospect of repayment. So a contingent bailout policy—implicit or explicit—must be coupled with some regulation of what banks can and cannot do. For example, a ban on lending to uncreditworthy customers might well make sense.