Bailout Analogy:

I've been thinking about co-conspirator Eric Posner's analogy (see chained post) in regard to the recent Treasury Dep't moves in the banking bailout:

It is now clear that Treasury will take a more aggressive approach. Not only will it buy commercial paper; it will buy equity in banks. . . . People call this process "restoring confidence" in the financial system; but it really just replaces one financial system (a more-or-less private one) with another (a government-run system). It's as if a hurricane hit a city and the national guard took over food distribution. We don't say that the government is restoring confidence in the private food distribution system; we say that it is operating the food distribution system, and will do so until the private system recovers on its own. (my emphases)

Is the food distribution analogy the right one here? There is a difference between buying equity in banks [or food distribution companies] and sending out the national guard to do our banking/food distribution work. Among other things, we (i.e., the Treasury) participates in the upside (if there is an upside) in the one and not in the other. And more to Eric's point: it is not quite as absurd to call the former a "confidence restoring" move. Warren Buffett's purchase of Goldman Sachs equity was widely seen (correctly, imho) as a move that could "restore confidence" in Goldman, because buying equity is very stupid if the firm is going into bankruptcy but very smart if the firm is going to recover. The Treasury plan is not exactly the same, I realize, but calling it a move that might "restore confidence" in the banks doesn't strike me as so terribly over-the-top.

Related Posts (on one page):

  1. Bailout Analogy:
  2. Plan B (C?).