The most important thing in the bank rescue plan should be cleaning up their balance sheets to the point where even in a worst-case scenario we don�t need to worry about bank solvency (at least for those banks that are left standing by the rescue). If the government announced, �we will buy any assets you want to sell, at their current book values,� this would be a massive subsidy worth hundreds of billions of dollars (and requiring trillions of dollars in initial outlays), but it would at least restore confidence in the banks. If the government announced, �we are taking over Citigroup, Bank of America, and JPMorgan because they are insolvent, and we will write down their questionable assets to nothing, recapitalize them, and later reprivatize them,� this would also restore confidence, although it would unleash a flood of litigation and political attacks against the government for engaging in �socialism.� But if instead you try to split the difference, avoid too much government involvement, and pretend you are not subsidizing the banks, you end up coming up with these too-clever-by-half subsidies that you are trying to hide from Congress and the public, and no one can be confident that they will work.

James Kwak, this morning while awaiting the Geithner Plan. RTWT. I think Jim Hamilton has this right: If everyone on Wall Street loves this plan, it's probably a bad plan.

Labels: banking, economics