Krugman on the problem with the bailout
Paul Krugman sums up the problem with the bailout in two paragraphs:
There's a reason Paulson et al had such a hard time communicating the case for their plan -- they didn't have a very good case. To this day they've never been able to explain clearly why buying up bad mortgage assets at market prices will solve the credit crunch. The Wise Men, as far as I can tell, have never had a clear idea of what they're doing.
My view, which I think is now shared by many economists, is that Paulson grabbed hold of the wrong end of the stick -- he should have been seeking to expand bank capital, taking an ownership share in compensation, rather than trying to push up the value of toxic paper. In the end, that's what we'll probably do.
Unfortunately, the solution Krugman envisions won't be pursued up front -- it will only happen after the Paulson plan has proven itself a failure, after an unknowable amount of damage to our economy in the meantime.