More Capitalization

| Wed Oct. 8, 2008 5:36 PM EDT

MORE CAPITALIZATION....Speaking of capitalization, I see that Justin Fox answers a question today that's been on my mind for a while. The bailout plan passed last week was designed to buy up troubled assets, but are the powers it gives to the Secretary of the Treasury so broad that the funds can be used to directly recapitalize banks instead? Apparently so:

Did anybody else notice that when Hank Paulson was describing in his press conference today what the Emergency Economic Stabilization Act enables Treasury to do, the first thing he listed was "to inject capital into financial institutions"?

That wasn't how Treasury initially advertised its Troubled Asset Relief Program. It was sold as a way to get the market for mortgage securities moving (or, to use the jargon, liquid). Lots of academic economists objected that liquidity wasn't the problem, it was insolvency. What Treasury needed to do was recapitalize financial institutions and take equity stakes in return.

....Yesterday Ben Bernanke hinted that a change in emphasis might be in the offing for the TARP. And today Paulson seemed to confirm it....I take it as one more sign that we're headed toward a Swedish solution of our banking crisis — recapitalization and temporary nationalization of much of the banking system. This is the right thing to do, I think. But I'm still a little bit confused as to why Paulson had to back into this instead of asking for it in the first place. Maybe because he thought President Bush would never sign a bill to nationalize the banks? Just a thought.

Very interesting.