The Corner

Re: The People’s Bank

Of course, many economists, as far as I could make out, argued like Andrew (if I recall correctly) that the recapitalization was a preferable alternative to the Paulson bailout plan. So, now he’s conceded that, he should send the extra $450 billlion back to Congress rather than keeping it to create further mischief. On the upside, the high (and scheduled to get higher) coupon price should also help ensure the temporary nature of the investment — banks will want to get short of it very quickly. We should, however, remember that the George Soros version of the recapitalization plan wanted a much lower coupon to stimulate lending. I’m not sure what leeway a future Treasury secretary will have to change these terms, but that prospect should be worrisome.

On the other hand, we should also remember that this act thwarts creative destruction. One thing we saw yesterday was that banks who were not exposed to the subprime risks were the big winners. These should be the banks we turn to in the future by virtue of their success at avoiding the risks. What this plan does is keep the current players and institutions in the game to these banks’ detriment. That is a big downside.

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