It's not too late to enact a better plan than the one the Treasury has put on the table. Peter Lee looks at alternative strategies that might prove sharper than Paulson's bailout plan.
If the federal government believes that it must recapitalize the banking system, then it should do so directly by investing equity in the banks. Buying troubled assets at above market prices achieves much the same thing – it hands capital to the banks and transfers risks of loss to the public purse. Surely there is no need to make things more complicated than they need be by creating a false market in hard-to-value securities.
Having urged Congress to pass Tarp in September with warnings of financial meltdown if it did not, Paulson was forced to admit on October 8 just how unprepared the US Treasury is to implement it. He says: “We expect it will be several weeks before our first purchase.” In the meantime, he points out that the Emergency Economic Stabilization Act empowers the Treasury to “inject capital” as well as to buy bad assets from banks and provide guarantees. “We will use all of the tools we’ve been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size.”