As the NYT and others have reported, the scope and function of the $700 billion bailout plan has shifted again, still before the first dollar has been spent. The good news is that it's probably a change for the better:
Last month, when he defended his bailout plan before Congress, Treasury Secretary Henry Paulson was reluctant to have the government take an ownership stake in the banks that taxpayers are going to rescue. It came as a relief on Wednesday when he executed an about-face and said that the Treasury was now considering doing just that. [...]
Injecting cash directly into banks in exchange for an ownership share would provide a quicker and more powerful boost to the financial system than the measures proposed in the original bailout plan. It would also be a better deal for taxpayers, because it would give them a direct claim on any postbailout profits earned by the bank.
Among the issues are that the original plan was complex and ill-defined -- this more basic approach is easier to administer, less prone to corruption, and should be much quicker to get off the ground. So... yay?
Still, this remains infuriating, because it shows once again that nobody -- not Paulson, not Congress -- had any clear idea of what the plan was going to be when they allocated, in one fell swoop, $700 freaking billion dollars. That doesn't instill confidence in any of the involved parties, either those that requested the money or those who handed it over.
And now that the money's been allocated, ironically, the Treasury has been apparently stuck in molasses -- no implementation plan seemed forthcoming, even while the markets have continued to spiral downwards. Hearing that they may scrap the original idea outright and go for the equity-based plan is probably the best news that the markets could hear, because it's at least something.
Will it work? Nobody knows. I tend to agree with those that point out that the problem isn't liquidity or even capital, the problem is that ungodly amounts of money have simply vanished -- been wiped out, thanks to the collapse of the housing bubble. There's not a lot that can fix that. Any plan is only going to be capable of, at best, letting things shake out in a somewhat orderly fashion, preventing a Depression-like collapse. That's what the massive infusions of capital are supposed to do -- it's just supposed to keep the train out of the ditch. We're still in for a wild ride.
Paul Krugman:
The consequences of Lehman’s fall were apparent within days, yet key policy players have largely wasted the past four weeks. Now they’ve reached a moment of truth: They’d better do something soon — in fact, they’d better announce a coordinated rescue plan this weekend — or the world economy may well experience its worst slump since the Great Depression. [...]
Why this weekend? Because there happen to be two big meetings taking place in Washington: a meeting of top financial officials from the major advanced nations on Friday, then the annual International Monetary Fund/World Bank meeting Saturday and Sunday. If these meetings end without at least an agreement in principle on a global rescue plan — if everyone goes home with nothing more than vague assertions that they intend to stay on top of the situation — a golden opportunity will have been missed, and the downward spiral could easily get even worse.
Well, that's certainly enough to curl your hair and make you want to stock up on canned goods. And to have it all hinge on the U.S. and other countries coming up with a plan, and cooperatively pursuing it? I think I need to lie down.
Short version: so far, we're in no better position than we were before, and in fact it's gotten worse with lack of overall strategy and with a series of huge market drops worldwide this last week. Great: now we've got a mountain of borrowed money allocated. But we still need a plan, which is the harder thing, and the thing everyone should have been working on with a bit more vigor from the outset.
(I'd suggest that John McCain needs to suspend his campaign again, but who are we kidding... a worldwide economic meltdown is nothing compared to the importance of riling up conservatives with fearmongering speeches about a guy who once was on a charity board with some other guy who you all need to be afraid of right the hell now.)
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