Monday, September 29, 2008

A Different Suggestion For a Bailout

Brad DeLong is another economist who was reluctantly supporting today's bailout plan, and is probably not shedding to many tears for today's defeat. DeLong has all along thought the 1992 Swedish plan makes more sense.

Here’s what he had to say on the subject today:

Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem. It might work like this.


• grants the Federal Reserve Board the power to take any financial firm whatsoever with liabilities and capital of more than $25 billion that is not well capitalized into conservatorship

• requires the Federal Reserve Board to liquidate any financial firm in its conservatorship when it judges that the firm is insolvent paying off in full or not paying off in full the liabilities of the firm at its discretion, unless

• the Federal Reserve Board finds that preservation as a going concern is in the interest of the taxpayer, in which case Congress

• grants the Federal Reserve Board the power to transform equity stakes in the firm into junior preferred stock at par value and then transfer ownership and custody of the firm to the Treasury

• requires the Federal Reserve to terminate conservatorship if the firm becomes
well-capitalized once again.

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