Sunday, October 12, 2008

Why Equity in Banks Came So Late

Why did the notion of taking equity in failing banks come so late to the administration in this crisis? Even now, Paulson is speaking of taking non-voting stock in failing financial institutions. Why? Felix Salmon has an answer:
But go back to Paulson's famous statement to the Senate Banking Committee on September 23:

Some said we should just stick capital in the banks, take preferred stock in the banks. That's what you do when you have failure. This is about success.

Whose failure is he talking about here? Narrowly, bank failures, of course. But also more broadly, he was talking about the failure of the laissez-faire regulatory system which he helped to create while CEO of Goldman Sachs -- a system which was governed by an ideology which said that markets not only could self-regulate, but would self-regulate.
This is why we don't have a full RFC-style solution yet. That will probably have to come with the next administration.
I suspect that one of the reasons the G7 failed to come up with anything substantive in Washington this weekend was that the US remains atavistically opposed to anything which smells of World Government: it's simply not in the nature of any Republican administration to go along with an international plan to bring a large proportion of the world's biggest banks under some sort of state control.
I only hope they don't let ideological blinders prevent them from taking the bold action that may be necessary. This was the main problem with Hoover.

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