Paulson: ‘Aggressive’ Global Effort Planned; U.S. to Take Bank Stakes

Wow, I go out into the field for one day, and the US government goes crazy! Driving back from an environmental assessment in The Dalles, I heard Henry Paulson’s voice on the radio, Details can be found on the Wall Street Journal.

Real Time Economics : Paulson: ‘Aggressive’ Global Effort Planned; U.S. to Take Bank Stakes.

the Fed is not going to buy the bad debt of lending institutions, but rather will buy stock in those institutions.

The simple version is that the Fed is not going to buy the bad debt of lending institutions, but rather will buy stock in those institutions. Under the previous plan, the Fed would have bought the risky debt from the banks, thereby saving the banks from loosing if the debt went sour. The positive thing here is that the banks are stabilized, but the negative thing is that the Fed- and the American tax payers- loose if the debt goes sour.

This is the plan that pretty much everyone thought they were signing. A late night rider that was snuck into the Bailout Bill which allowed this new “stock injection” action- an action that was almost universally avoided by the House and the Senate.

The new plan has the Fed leaving the risk of the bad debt in the hands of the banks and instead injecting cash directly into the banks by buying stock- thereby becoming an investor themselves.

Many finance analysts approve of this method because it allows the Fed to have a share of the rewards that is commenserate with the risk it is taking. Others oppose it because it is direct government influence on the banking sector- possibily influencing business decisions based on politics.

The hope is that this will not happen. Paulson’s statement seems to suggest that The Fed will take a backseat to decision making by purchasing non-voting stock; however, the speech came with few solid details.

Personally, I believe that if we, the taxpayer, are going to be responsible for the bad decisions of the financial market in times of great risk and disruption, then it is only fair that we share in the profits during the good times. This plan will allow that to happen.

However, I do worry about the effect of this on the market, and about the government’s reaction to crises in the future. This is the closest that the government has ever come to nationalizing such a private infrastructure as the financial market. It is something we will have to watch, both for the outcomes and for the precident.

Clearly this is a time of turmoil.

No Comment