Thread: The wrong kind of bail-out?

[Note: this is a blog (opinion) and is from the UK financial press. Whether or not you agree, at least it's a thought piece.]

Financial Times


An excellent column by Sebastian Mallaby looks at the unfolding Fed-Treasury plan and finds it wanting:

"The plan is being marketed under false pretenses. Supporters have invoked the shining success of the Resolution Trust Corporation as justification and precedent. But the RTC, which was created in 1989 to clean up the wreckage of the savings-and-loan crisis, bears little resemblance to what is being contemplated now. The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust. This difference raises several questions.

The first is whether the bailout is necessary. In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTC’s job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice. It would spend billions of dollars on the theory that preemption will avert the mass destruction of banks. There are cheaper ways to stabilize the system."

I’m a little reluctant to second-guess the proposal put together by Bernanke and Paulson because I don’t know everything the Fed knows about the fragility of the credit markets and the urgency of the case. But I agree that the RTC analogy is wrong, and the column is surely right about the problems the Fed-Treasury plan faces. The article goes on to mention separate alternative proposals by Charles Calomiris and Raghuram Rajan. Both stress the need to recapitalise the banks. Calomiris would do it through government purchases of equity, Rajan through mandatory rights issues and a prohibition of bank dividend payments..........

http://blogs.ft.com/crookblog/2008/0...is_mailing////