Saturday, October 11, 2008

Is Recapitalizing the Banks By the Government the Answer to Restore Confidence in Financial Markets?

The answer is a yes for a growing number of economists according to this WSJ story:

The government's plan to buy equity in financial institutions, announced Friday by Treasury Secretary Henry Paulson, is an idea that many academic economists have championed from the start of the crisis.

Here is more.

However, just days ago also in the WSJ, Gary Becker does not believe taking equity stake in banks by government is a good idea:

One troubling provision is that the government can take an equity stake in banks it helps. Some economists have proposed a similar role for government equity in these banks. I believe it is unwise to give governments equity in private companies, even if the government does not have voting rights in company policies.

Many examples in recent history, such as the current Alitalia fiasco, show that political interests outweigh economic ones when governments have some ownership of private companies. This is likely to happen in this bailout if some banks that are helped decide to sharply cut employment in the districts of some congressmen, or to transfer many jobs overseas.

Read the whole thing here.

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