At today's Wall Street Bailout Hearings, we finally learned what Hank Paulson and Ben Bernanke are thinking. Specifically, we learned what prices they plan to pay for the crap assets they're buying (more than they're worth). And we learned why they picked this plan instead of one more like Sweden's in the early 1990s, which included the government taking ownership stakes in the banks it saved.
The main justification for the plan is that taxpayers are already screwed because banks have stopped lending money. The big difference between this bailout and the ones that have come before, meanwhile, is that the banks aren't yet on death's door. Thus, in Paulson and Bernanke's opinion, these banks must be persuaded to participate in the bailout--by making it a boon to them and a liability for taxpayers.
What Paulson and Bernanke are trying to do, in other words, is fast-forward the economic-crisis movie a couple of months: Instead of waiting until the banks realize that they are hosed and come begging for help, we'll just solve all their problems now. The trouble with this plan is twofold:
* First, until the banks are on death's door, they'll use any government largesse for their own gain: Specifically, they'll only sell assets they think the government is overpaying for (otherwise, why would they sell them)? And the banks know far better than the government will what their own assets are worth.
* Just cleaning up the banks' mistakes will not make them start aggressively lending again. Yes, it's the first part of the process, but contrary to Paulson's assertions this morning, cleaning up bank balance sheets will not quickly fix the housing market. The trouble in the housing market, remember, is that millions of houses were bought by people who couldn't afford them. These folks still can't afford the houses, with or without loans (and especially now that the economy is cratering). So merely making the banks able to lend again won't suddenly soak up all the excess housing inventory.
It may be that what Paulson and Bernanke are trying to do is essentially impossible: Save companies before they know they are screwed. This doesn't mean it's not worth trying. But it does mean it's unlikely to succeed without the taxpayers getting burned.
The government has already headed off the immediate crisis by announcing that it intends to help. Now, it should use that assurance to play more of a backstop-of-last-resort sort of a role, where it only helps companies that are truly in trouble and gets a significant equity stake for doing so. Anything less will bail out idiot banks and their shareholders at the expense of taxpayers.