by Damozel | After trying everything else, and in particular a bailout plan that
even a simple layperson like me could have told them wasn't going to work, the
Treasury is apparently leaning toward the recapitalization plan that most
economists supported in the first place. (Calculated Risk) Since most of the smart people said that this is what should have been done in the first place, I am all for it. Even so, I can't help laughing. As Jeff Fecke says, "Bankers of the world, unite!"
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.(NYT)
In other words, they're modelling the new plan on the one adopted in Great Britain.
Hee hee. Atrios says:
Only Nixon could go to China. Only Bush can finally bring the Marxist Revolution home!
Also:
[I]t'd be nice to see a bit of a reckoning in our mainstream media, which even more than the most right wing academic economists have over the past couple of decades embraced the Magic Free Market Fairy as the answer to all things.
The Washington Consensus: wrong about everything, all the time
And they are going to do what Paul Krugman's been saying all along they should do.
A tentative cheer: Paulson may have been dragged kicking and screaming into doing the right thing to rescue the financial system...Let’s give thanks to Chris Dodd, who insisted on the provision that makes this possible — and to Gordon Brown, for showing the way.
Justin Fox says:
Did anybody else notice that when Hank Paulson was describing in his press conference today what the Emergency Economic Stabilization Act enables Treasury to do, the first thing he listed was "to inject capital into financial institutions"?
That wasn't how Treasury initially advertised its Troubled Asset Relief Program. It was sold as a way to get the market for mortgage securities moving (or, to use the jargon, liquid). Lots of academic economists objected that liquidity wasn't the problem, it was insolvency. What Treasury needed to do was recapitalize financial institutions and take equity stakes in return.
When members of the Senate Banking Committee pressed Paulson on this two weeks ago, he pushed back. "Putting capital into institutions is about failure," he said. "This is about success." (TIME)
Digby observes sourly: "Thank goodness we still have muslims forming a fifth column or the right would have no one left to hate."
But now even the staunchest believers in the Magic Free Market Fairy are seeing the hand-writing on the wall (as in "Wall Street").
The idea is gaining support even among longtime Republican policy makers who have spent most of their careers defending laissez-faire economic policies.
“The problem is the uncertainty that people have about doing business with banks, and banks have about doing business with each other,” said William Poole, a staunchly free-market Republican who stepped down as president of the Federal Reserve Bank of St. Louis on Aug. 31. “We need to eliminate that uncertainty as fast as we can, and one way to do that is by injecting capital directly into banks. I think it could be done very quickly.”
Krugman gives himself and other "academic economists" a well-deserved pat on the back for their foresight in.
Nouriel Roubini has some of the back story on how the TARP came to include provisions that could be used to recapitalize banks. From early on, there was indeed a feverish push by a number of economists, myself included, to get some channel for public capital injections in return for equity stakes into the plan. I reluctantly called for passage of the final bill because it did include such a channel, although it didn’t require that Paulson use it. There were a lot of accusations against those of us who took that position — claims that we were caving in, or trying to have it both ways. But the equity issue was crucial — and may now be the thing that turns a useless plan into something that really does a lot of good.
The boffins of Naked Capitalism approve....
A good bit of news: the Treasury may purse this play through the authority granted in the $700 bailout bill. That is a far better use of funds than buying toxic assets, which is a very indirect and costly way to achieve the same end. However, note the interpretation that banks have to request help.
However, the article suggests that there may be some backtreading from Paulson's extreme pro-industry posture that the process had to "encourage" banks to participate (recall he was able to secure completely toothless executive comp provisions, when Congress wanted something much tougher but caved fast). The plan version 2.0, for equity injections, appears to have a few teeth at least as far as executive pay is concerned, but it remains to be seen how serious these measures turn out to be.
Jeff Fecke points out the lesson that should be drawn by Main Street Republicans and yet never is:
I do think it’s fascinating that this meltdown has completely eliminated the last fragmentary claim that the GOP ever was a party of smaller government. I mean, if Robert Reich had suggested nationalizing the banks, there would have been armed insurrection..... The right would have gone berserk.
We would have been one step closer to the communist dystopia that the Republicans always say the Democrats are trying to usher in. And yet here we are, and the GOP is spearheading the largest government intervention in the economy since the Great Depression, and…well, it’s all okay, because if we don’t intervene, the rich will be hurt. (The poor, too, but the GOP doesn’t care about them.)
In the end, the GOP had a chance to walk their talk for the past three decades. Instead, they did what they always do: they did what was best for corporate America. Because the GOP has never been the party of small government. It’s been the party of the rich, and of corporate greed. (I’m all for intervention if needed, but I’m a liberal; I don’t pretend that the government has no role in society.)
Digby says, "We are all socialists now." What price, then, Hindrocket's and many Cornerites' desperate and pathetic assertions that Obama is a secret socialist?
More at Memeorandum.
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And this is my plan, my friends, and we are all Americans, my friends; my friends are all American friends of Americans. But, look -- I've served bluh bluh and take the principle of homeowners' denooberation, with rink back bluh bluh and eye of Newt, my frinds, and I have a proven bluh bluh bluh, my friends. It's simple. All Americans can understand, and those that don't are friends of Bill Ayres, my friends.
And That One, over there, will impose mandates -- mandates, my friends. That's unbelievable in America, my friends. I want to give every American my friends, because why not? Don't we cross state lines to get something? Don't we cross state lines with young girls in America? Do the math. I'm nervous, my friends, and Americans understand that, but they're certainly nervous Americans, even if their fundamentals are strong. If you add $5,000 to what's left over, ninety-five per cent of my friends will be covered, with hair transplants like the one I need, my friends.
Uh, Bobo; what was the question?
Posted by: John McCain (Ret.) | October 09, 2008 at 04:38 PM