Why, other than gross political negligence, shouldn’t this bailout be in the form of a recapitalization of banks for an equity stake? Sure, some banks won’t be recapitalized and will be left to fail, and sure, some misguided cranks will cry socialism, but that still doesn’t legitimately explain why.
George Soros has got a plan:
Instead of just purchasing troubled assets the bulk of the funds ought to be used to recapitalise the banking system. Funds injected at the equity level are more high-powered than funds used at the balance sheet level by a minimal factor of twelve – effectively giving the government $8,400bn to re-ignite the flow of credit. In practice, the effect would be even greater because the injection of government funds would also attract private capital. The result would be more economic recovery and the chance for taxpayers to profit from the recovery.
Private investors, including me, are likely to jump at the opportunity. The recapitalised banks would be allowed to increase their leverage, so they would resume lending. Limits on bank leverage could be imposed later, after the economy has recovered. If the funds were used in this way, the recapitalisation of the banking system could be achieved with less than $500bn of public funds.
So why isn’t this the plan?
If the GOP wants to save themselves, they’ll jump ship for the deal outlined above.