Monday, September 22, 2008

What's the Goal of the Bailout?

Today, in response to the Republican bailout plan discussed yesterday, Senator Chris Dodd (D-CT) proposed his own addendum to the plan. It would require the banks which sell troubled (i.e., possibly worthless) assets to also give the Treasury Department contingent shares in the bank which would protect the value of the troubled asset the government (i.e., taxpayers) bought. As I understand it, if the government pays $2 million for an asset and then is only able to sell it for $1 million, the government gets $1 million in stock in the company it originally bought the asset from.

This seems like a good idea because a) the banks are allowed to liquidate their bad assets, and b) taxpayers don't lose any money, which is great, because they didn't do anything wrong. But of course, Wall Street and some (though not all, to the credit of the party) Republicans are balking at Dodd's idea, stating that it will hurt banks' profitability or "stigmatize" them by forcing them to accept such conditions.

That would be an argument that mattered if the goal of the bailout were to help banks. Let's be clear here. The goal is (or, well, at least should be) to stave off a new Great Depression. By all rights, these banks should go out of business. Shareholders, far from being worried about the government taking a piece of their company, should be more worried about the "free market" running their company out of business.

Look, the market's got a gun to the banks' heads, and we're stepping in to bail them out. Since we're doing so at taxpayers' expense, the goal should be to do the absolute minimum to keep the banks in business and back to writing mortgages. Protecting shareholders' investments is utterly irrelevant, because without us, their investments have no value at all.

No comments: