In a MAJOR reversal, the flexibility to buy shares in troubled banks--as Britain is doing--may be taken up as the primary direction, the NY Times reports. The result would be a giant step toward Paul Krugman's preferred alternative:
Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.
Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks' balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.
The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.
The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.
Readers ask what I think should be done about the financial crisis. The answer is, what Gordon Brown in doing in Britain: a bailout, yes, but one that gives the government an ownership stake in the bailed-out institutions. That plus a serious fiscal stimulus plan that includes emergency aid to state and local government.
The Brown plan, by the way, is 50 billion pounds; scaled by GDP, that would be the equivalent of a $500 billion plan here. The headline number would be smaller than the Paulson plan, but the probable effectiveness much, much greater. Not so incidentally, my reading of the TARP as passed is that thanks to the equity participation provisions, it could be converted into a version of the Brown plan at the Treasury secretary's discretion; let's hope that he does so discrete, or something like that, as soon as possible. (Brad DeLong seems to agree; the Brown plan is a close relative of the Elmendorf plan.)
Meanwhile, John McCain's bailout plan manages to take everything that's wrong with the Paulson plan and make it worse. I'll outsource the explanation to Brad.
Let's back up. For the past month the debate about how to deal with the collapse of the debt-trading portion of America's financial
markets has been between two plans: the Paulson plan and the Elmendorf plan:
The Paulson Plan: Have the government buy up distressed securities at market value, thus reducing the supply of high-yield debt securities that the private sector must hold. When you reduce the supply of anything you raise its price. Hence the Paulson plan's $700 billion purchases will push the prices of risky debt securities up, and so companies will then be able to sell their bonds again and so hire more workers, and depression will be averted.
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The Elmendorf Plan: Have the government directly invest in and take an equity stake in troubled banks, thus reassuring their depositors and creditors that they are sound. The banks will then be able to profit by buying up distressed securities--hence raising their prices--and by directly lending to companies that will then be able to hire more workers, and depression will be averted.
The argument for the Paulson plan was that the Elmendorf plan was socialism.
So.... Look's like socialism's looking pretty good right now.
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