If you listened to the This American Life episode that I recommended the other day (if you didn’t, it’s not too late), and even if you didn’t, you’ll find this development interesting—and encouraging.
A tentative cheer: Paulson may have been dragged kicking and screaming into doing the right thing to rescue the financial system:
Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.
Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.
Update: Nouriel Roubini has some of the back story on how the TARP came to include provisions that could be used to recapitalize banks. From early on, there was indeed a feverish push by a number of economists, myself included, to get some channel for public capital injections in return for equity stakes into the plan. I reluctantly called for passage of the final bill because it did include such a channel, although it didn’t require that Paulson use it. There were a lot of accusations against those of us who took that position — claims that we were caving in, or trying to have it both ways. But the equity issue was crucial — and may now be the thing that turns a useless plan into something that really does a lot of good.