Wednesday, September 24, 2008

The Bush problem: how to rescue without ownership

So now we understand why the Paulson plan is so weird.

It is constrained by the Bushie's ideological aversion to owning private companies (emphasis mine, note Japan is not mentioned) ...
A billion slap in the face - Paul Krugman - New York Times Blog

... let’s talk about how governments normally respond to financial crisis: namely, they rescue the failing financial institutions, taking temporary ownership while keeping them running. If they don’t want to keep the institutions public, they eventually dispose of bad assets and pay off enough debt to make the institutions viable again, then sell them back to the private sector. But the first step is rescue with ownership.

That’s what we did in the S&L crisis; that’s what Sweden did in the early 90s; that’s what was just done with Fannie and Freddie; it’s even what was done just last week with AIG. It’s more or less what would happen with the Dodd plan, which would buy bad debt but get equity warrants that depend on the later losses on that debt.

But now Paulson and Bernanke are proposing, very nearly, to do the opposite: they want to buy bad paper from everyone, not just institutions in trouble, while taking no ownership....
Doing this without ownership is new ground. It's a choice mandated by executive branch ideology, not empirical reasoning.

You can't have it both ways. Either stay hands off and let the economy go where it will (to heck probably), or intervene and accept the scarlet stain of government ownership.

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