Back To Plan A On The Bailout?

One of the reasons I've been reluctant to weigh in on the relative merits of each iteration of the bank bailout scheme is that I've felt like a lot of folks much more qualified than me have come up with good arguments for and against each plan. I noted this in an earlier post in which I touched on the pros and cons of buying up bank assets versus using the bailout money to provide funds to get banks to start lending. If you've been following the debate, you may remember that Hank Paulson's initial plan was to use the money to take bad assets off the banks' hands. This was widely criticized as a give-away to financial companies that would result in the government paying too much for bad assets and still failing to quickly jump start the credit markets. So the government went with an alternate plan of pumping capital into the banking system as quickly as possible with an emergency package of low rate loans.

It's become clear that approach has not worked yet, and will not work as fast as was hoped. Now the consensus is shifting again, and the current thinking is that the government will need to set up a "bad bank" similar to the Resolution Trust Corporation, which bought up bad assets of savings and loans in the crisis of the 1980s. It turns out, it seems, that if the government doesn't buy all those bad mortgages and other failing securities, the banks will simply keep taking whatever money is given to them to lend out and use it to shore up their balance sheets.

This leaves us back almost exactly where we were three months ago. The next debate among economists will be about how much the government will have to pay for all those bad assets. The answer, unfortunately, is going to be "a lot more than they are worth." At this point, however, the concern about how much the bailout will cost is looking a lot less important than finding a solution to the intractable and worsening credit crisis--it's turned from a question of "How much will this cost us?" into one of "Is there any stimulus plan that's likely to succeed?"