As I wrote in my previous blog, Paulson’s bailout package was the wrong move. Today, he announced that he will scrap the “buddy bailout” plan and will do what makes sense: capitalize the banks directly. This is a good move, but I sincerely hope the treasury considers the option of matching private investment for a non-controlling stake. This would avoid possible conflicts of interest that might come with outright nationalization.
It has also come to light that Bernanke privately preferred this approach all along. Bernanke spent most of his career studying recessions, and as I pointed out previously, the majority of leading economists were also behind this strategy…
According to Paul Krugman (who just won the Nobel Prize):
But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying,