Directly recapitalizing troubled banks is yet another idea under consideration, of course. Greg Mankiw comments:

Do I need to point out that Greg Mankiw has supported all those wonderful tax cuts and deregulation, and he is, in fact, kind of stupid?

And the private sector rather than the government would exercise corporate control.

Which is precisely the problem. They are all zombie firms, and the zombies don't want to die. Oh, well. Our problem is, is that we want a functioning banking system in place while we attempt to cope with the real world issues of a collapsing bubble, a collapsing stock market & etc. In particular, we need to cope with the legal issues around all those imploding derivatives. The Fed lending to large non-financial corporations is exactly the same thing as nationalization, except less efficient and successful.

The only way to do that is to take the banks on the run, (because we have to) and salvage what we can after panic dies down.

Why this is such a difficult concept to comprehend, particularly for people who had no real problem with declaring war on the rest of the planet, or having the government help foster a housing bubble is beyond me.

Well, it isn't beyond me, since it is the point at the intersection of stupidity and greed.

max
['Man, people just don't learn.']

Certainly we wouldn't want the American taxpayer benefiting from the massive amount of money they are being asked to guarantee. It's socialism. Now if we can use govt money to enrich Buffet and other billionaires that would be ideal.

Given a choice of quoting Greg Mankiw or Nouriel Roubini, you choose Greg Mankiw?

On Marketplace tonight, author John Steele Gordon and a few others described how and why we would not be falling into a Great Depression and shamed journalists who keep making this claim (basically we now have Keynes and the New Deal and many more economic tools)

On the other hand, Paul Krugman in his latest blog post does talk about avoiding a 1931 style collapse of the financial system.

Now if I were a famous blogger with the strength of a world famous progressive investigative journal behind me, I might send off an email or two on occasion and commit the sin of original journalism. I do wish you would use your blog for good and not for evil.

Let's see, use my money to help out the millionaire & billionaires who created this mess, but give me no say in how the property I now own is used.
Why don't I get a say? Well, that would be "socialism"! I say we replace the word "socialism" with a phrase from an earlier time. I propose "ownership society". Since I own it, I can decide how to use it.
Libertarian socialism, bitches!

However, Mankiw, Roubini and Lenin are being a bit silly. Many banks have preferred shares outstanding. They are bought and sold in arms length transactions. There is a market price. Why not use that. Lenin at least proposes leveraging Buffet up 100 fold. Mankiw's plan is likely to be tiny. Why one for one ? why only if the equity is new ?

Now the market price has to be the market price *before* the plan is announced as market prices can be manipulated. This would seem to be a much worse problem with new equity sold in "arms length" transactions where the length of the arms can be easily faked.

This Wooten guy sounds like a real piece of work, let's be clear about that, and it's perhaps not the most outrageous thing in the world that the Palins were upset about the way the Alaska state police had treated his behavior with kid gloves.

What we know about Wooten is (1) the Palins say he's a bad guy, but haven't really offered any proof, (2) the judge in the divorce case didn't think there was much to the Palin's claims, and told them to shut up and butt out, and (3) he's largely kept his mouth shut in response to the Palins since Sarah Palin obtained national prominence. I don't see any basis for concluding that he's a "piece of work." Gov. Palin and her husband, however, won't accept the ruling of the court, and are abusing the governor's power for private reasons.

Ultimately, it doesn't amtter how bad Wooten may turn out to have been. Poltical officials don't get to be judges in their own case. Plain Mrs. Palin might have had a right to complain about her ex-brother-in-law's behavior, but Gov. Palin is supposed to shut up and let the responsible officials handle the matter without interference.

I don't know how well thought out this Mankiw plan is. Let's say you have a small zombie firm that's a penny stock. Some rich guy invests $100 million in it. If it's a small firm, then it's obvious that the next $100 million that the government invests is going to be way overpriced. So the rich guy sells his stock at a huge profit. Soon after that, the government sells its shares at a huge loss, and the zombie firm probably is one step closer to death.

Any plan should have the advantage of being comprehensible to people who have to end up paying for it. While I'm no economist, the idea of recapitalizing banks (real banks, not investment houses or mortgage companies)is one people can get their heads around because, even though they've become massive and impersonal, banks still stand as solid, stolid institutions in almost every middlesex village and town. - Ted

If "no taxation without representation" was good enough in 1776, then "no investment without representation" is good enough for 2008.

The Gipper speaks -- Reagan for Obama -- Must See TV!

http://www.youtube.com/watch?v=IqfedYAAGEI

TED pushing 4.5!

So, under Mankiw's plan we do nothing until "future Warren Buffets" step forward? Isn't that kind of a thin market?

The only way the credit markets will calm down is if governments, somehow, someway, takes the risk out of short term credit transactions. That is almost a definition of socialism--no matter how you dress it up. Mankiw is desperate to avoid it because of his fanatical devotion to free market ideology. Incidentally, it's the same fanatical devotion to unregulated markets (especially in credit default swaps)that created this crisis.

Mankiw is partially correct. We shouldn't attempt a rescue of institutions that are destined to fail anyway. And also, there is no reason to pump cash into currently healthy banks; they can stand on their own.

But this idea about following private investors in is pure hogwash. There is a simpler and much more transparent way to choose these "investments". First, the banks must come to our government, and ask for help. Some will be reluctant to ask for help, as it is an indication of weakness, and the market punishes weakness. Nonetheless, if you want to dance, you gotta ask.

Second, if you want our cash, you'll open up your books for government auditors. If we don't like what we see, you're on your own.

And third, in return for our equity stake, we get a seat on the board.

This is how "White Knights" operate in the real world, there is no reason to re-invent the wheel with a taxpayer bailout.

db

This plan would solve the three problems. The private sector rather than the government would weed out the zombie firms.

To echo others above, this seems problematic. I want the weeding to proceed as quickly as possible. Robust government auditing of the books of banks is likely to make the process work faster than waiting for the market to take care of things, espcially given the incentives of CEX level bank managers.

The private sector rather than the government would set the price.

The private sector can set the price even in the context of a Swedish-style bailout given this existence of this thing called the stock market. Maybe Mankiw would prefer that government ignore market prices when purchasing bank equity, but that just insures taxpayers will overpay. I'd rather not overpay for bank shares, but then again money's probably more of an object to me than it is to a tenured Ivy League professor.

And the private sector rather than the government would exercise corporate control.

Again, this seems a nonsensical point. In the first place the private sector alone doesn't have a very good track record of late. But in the second place, the purchase of preferred shares by the government does not imply government control. On the contrary, holders of common stock would still exercise voting control of the company, and private managers would run day to day affairs.

Let me add, the framework for an effective solution to the financial crisis is set. At this point, for the most part, we're discussing details.

But the one important component that is missing, and has been missing since the beginning, is leadership. Much of what we are seeing in the markets is driven by fear. Panicked investors are pulling their money out of equities in a desperate attempt to avoid further losses. People are foolishly cashing in their mutual funds and realizing losses that heretofore where only on paper. Consumers, even those who have secure employment, have clamped down on spending. And what we need the most is true leadership. Like it or not, those of us who are in a sound financial position need to be out there spending. And now is not the time for many of us to cash in our mutual funds or pull out of the market. Yet we lack the national leadership to tell us these things.

I'm not trying to downplay the crisis, nor am I insensitive to people's individual positions, but those of us who are only tangentially affected need to remain calm and continue spending and investing. In fact, it is our duty as citizens to do so.

To me the interesting thing is not Mankiw's extra conditions, but the fact that he clearly supports re-capitalization of the banks via equity purchase rather than buying toxic waste.

This is what I was talking about when I said in previous threads that Krugman and Mankiw are largely in agreement.

Any plan that buys equity has got to be better than the buy toxic waste approach that Paulson was originally pushing. Maybe the Brits will shame them into doing something sensible.

We should demand that all executive pay/compensatiion should have be published for 6 months prior to vote. And that the vote must be a majority of all share not under management control( no proxies).

Public disclosure by commercial banks is notoriously spotty. The only ones with good inside information are a) the insiders and b) the bank examiners.

The Comptroller of the Currency, the Fed and the FDIC might actually have a pretty good idea who the zombies are.

Commercial banks and insurance companies are another matter. Matching equity contributions might make sense. We still have the insider/outsider problem, but here there isn't necessarily anyone in the federal government with special expertise.
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Then again...

If the Feds have such great inside info, then it might not be so difficult to get matching private funds. Paulson might want something that looks a lot like the Mankiw plan, but the purpose would be to get more total equity investment for a given federal outlay.