Bailout Reax

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BAILOUT REAX….Paul Krugman opposes the Paulson/Bernanke bank rescue because there’s no guarantee it will work. Atrios doesn’t like it because it gives Paulson a blank check with no oversight. Brad DeLong doesn’t like it because it lacks necessary reforms to balance the bailout. Sebastian Mallaby, by contrast, just doesn’t like it, period:

Within hours of the Treasury announcement Friday, economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans.

….Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments. Banks don’t do that on their own because it would signal weakness; if everyone knows the dividend has been canceled because of a government rule, the signaling issue would be removed. Second, the government should tell all healthy banks to issue new equity. Again, banks resist doing this because they don’t want to signal weakness and they don’t want to dilute existing shareholders. A government order could cut through these obstacles.

Meanwhile, Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks’ bad loans but by buying equity stakes in the banks themselves. Whereas it’s horribly complicated to value bad loans, banks have share prices you can look up in seconds, so government could inject capital into banks quickly and at a fair level. The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.

Congress and the administration may not like the sound of these ideas….But we are in the midst of a crisis, and it shouldn’t matter how things sound. The Treasury plan outlined on Friday involves vast risks to taxpayers, huge complexity and no guarantee of success. There are better ways forward.

The tide has started to turn against the bailout plan surprisingly quickly. Is this just because the market recovered on Thursday and Friday and things seem slightly less scary now than they did a couple of days ago? Is it because this plan is flawed at its core? I’m not sure. But by the time Monday rolls around, I suspect there’s going to be at least a strong minority consensus that we should all have a little more information before we get steamrollered into approving this thing.

Meanwhile, if you’re looking for a good old fashioned screed against greedy bankers written by someone from within their own ranks, check out Eric Hovde in the Post today. It’ll help clear your arteries.

UPDATE: And then there’s this:

“A lot of those people will have to sell their homes, they’re going to cut back on the private jets and the vacations. They may even have to take their kids out of private school,” said [Robert] Frank. “It’s a total reworking of their lifestyle.”

….”It’s going to be very hard psychologically for these people,” Frank said. “I talked to one guy who had to give up his private jet recently. And he said of all the trials in his life, giving that up was the hardest thing he’s ever done.”

Anybody got a tissue? I think I may start crying.

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We didn't know what to expect when we told you we needed to raise $400,000 before our fiscal year closed on June 30, and we're thrilled to report that our incredible community of readers contributed some $415,000 to help us keep charging as hard as we can during this crazy year.

You just sent an incredible message: that quality journalism doesn't have to answer to advertisers, billionaires, or hedge funds; that newsrooms can eke out an existence thanks primarily to the generosity of its readers. That's so powerful. Especially during what's been called a "media extinction event" when those looking to make a profit from the news pull back, the Mother Jones community steps in.

The months and years ahead won't be easy. Far from it. But there's no one we'd rather face the big challenges with than you, our committed and passionate readers, and our team of fearless reporters who show up every day.

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