Monday, September 22, 2008

Krugman: Cash for Trash

by Bill McBride on 9/22/2008 12:06:00 AM

Professor Krugman writes in the NY Times: Cash for Trash. A few excerpts:

How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging ... Even that isn’t clear ... And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?
emphasis added
I believe this is exactly the plan - to buy assets at premium prices and thereby recapitalize the banks. As I noted earlier, this will probably be successful in getting the banks to lend again, but that "success" would come at an astronomical cost to taxpayers. And there would probably be other unintended consequences.
The logic of the crisis seems to call for an intervention ... but ... the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.
The current plan is vague, opaque, has almost no oversight, puts the taxpayers at extreme risk and encourages future moral hazard.

A better plan would be transparent (all deals would be publicized), involve a share in ownership for the taxpayers, and have substantial oversight. We can do better.