I’ve talked over the last few days to everyone I know who knows this stuff–conservatives all–and have found no one who says we don’t need something big, even among the skeptics of the Paulson plan. Someone I talked to today with impeccable free-market credentials was very down on the Paulson plan–because he doesn’t think it’ll do enough. He supports pumping capital into the banks directly and temporarily nationalizing them instead. Needless to say, it’s a crazy time. Yesterday, I was talking to a sharp Nevada banker who, like John Hood’s friend, has no stake in this. He got out of the mortgage business three years ago because he thought it was so out of control and was absolutely scathing about the irresponsibility of Wall Street and the injustice of these people getting a bail-out–but stipulated that he supports it anyway as necessary for the economy.

The Journal had an excellent editorial (discussed earlier), and this is the key passage:

The core of that sickness is a large capital hole in the financial system, and private capital alone can’t fill it. A variety of mortgage securities are underpinned by housing assets that are falling in value. Those losses are real and will have to be written off eventually.
Private capital is vital but won’t be forthcoming as long as no one knows what those assets are worth and which firms might fail. Public capital will be needed to refinance the banking system, whether through the FDIC or some other mechanism. Anyone who thinks otherwise doesn’t understand the extent of this problem.

That’s the crux of the problem and why all these smaller schemes—various ways to try to prop up the housing market, to keep banks from paying dividends, etc–are insufficient: they won’t do enough, and they won’t do it fast enough. Conservatives who oppose the plan should be forthright that they are willing to take the pain of what could well be a sharp 1980-1981- or 1974-75-style recession, or perhaps something worse that will take the country years to recover from, rather than go down the road of this kind of governmental intervention. There’s a case to be made for that, even if not many people will make it.