Rich – I’m basically with you. I think the bailout plan stinks from my limited and less-than-fully-informed vantage point. But lots of necessary things stink. World War Two was a major bummer, but it was better than the knowable alternatives. Likewise, I haven’t seen an alternative proposal that delivers all of the components we seem to need: clarity, action, comprehensiveness etc. That said, I was speaking earlier today with an executive at a major brokerage today and she echoed what I’ve been hearing from lots of folks: there must be a better way. Many point to Sebastian Mallaby’s much discussed and very illuminating column yesterday. I liked these two suggestions:
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.
Again, I have no idea whether these proposals and similar ones would do the trick. One analogy that keeps coming into my head is oil well fires. As I understand it (and I know if I’m wrong a billion oil-firefighters will write in), the worst thing you can do when trying to put out an oil well fire with dynamite is not using enough dynamite. The explosion needs to be big enough to suck all the oxygen out of the air and blow out the conflagration. Use too little TNT, and you just spread the fire even further. The $700 billion price tag doesn’t scare me as much as most people people because I figure it’s a line of credit, not an actual outlay (Lord knows that could turn out to be wishful thinking). But the Treasury needed to make the number big enough to stop the fire. These other proposals may be more clever and innovative, but I’m wondering if scalpels aren’t what’s required. We need a big club.
Okay, I mixed up the metaphor horribly, I know. But that’s just where my head is I try to get up to speed on this stuff. My instincts are all on the anti-bailout side, but I just haven’t been intellectually persuaded that there’s a better alternative.