Jeffrey Frankel (and many others) argues that the Paulson plan is not the right remedy. Rather than buy up bad loans, we should inject capital into the institutions that need it – and get equity for our trouble (via Vox):
Examples are not tied to economists from a particular political viewpoint or party. He mentions the proposals of Ragu Rajan (FT.com) and Luigi Zingales that the government could tell banks to cancel all dividend payments. And proposals by Charlie Calomiris and Doug Elmendorf (Brookings) that the government could buy equity stakes in banks themselves, rather than just buying their bad loans.
Similarly, in today’s New York Times opinion page we had Paul Krugman on the left side of the page and Bill Kristol on the right side of the page. What Mallaby calls the core insight is also the crux of Krugman’s logic (“Cash for Trash”):
“…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.”
Sounds right to me. Don’t socialise the losses without socialising the gains.
I’m not very enthusiastic about the government owning equity stakes in US corporations, but if taxpayers are taking the risk, they should get the reward if it works.