Stock Injection: An Unlikely Early Christmas Present to the American People

"Capital" or "stock" injection is an alternative, direct investment option now being considered for the rescue of the United States economy. NPR's Chris Arnold has cleverly termed it "the Backdoor Bailout plan." On Sunday, NPR reported that at the last minute, an unknown individual or individuals slipped vague language into the bailout legislation Bush signed into law, which left open the possibility of a stock injection plan resembling the one that Britain opted for yesterday. This type of plan, which is different from the blank check proposal of Treasury Secretary Paulson, amounts to the United States government administering a partial nationalization of--or, as the New York Times has termed it, "taking an ownership stake in"--its banks. Arnold explains the difference between Paulson's proposal and a stock injection plan:

Treasury Secretary Paulson seems convinced that the best way to solve the immediate financial crisis is to buy up hundreds of billions of dollars worth of bad debt on the books of financial firms. Others disagree. They ask, why not just give cash to the banks to prop them up without buying their toxic mortgage-related securities? Some say, given capital requirements for banks, you get $12 dollars in debt assistance for every $1 of cash you directly pump into a bank. So why not just do that? And take stock in return so the government gets paid back? Basically, they say the government should do what Warren Buffet did when he invested in Goldman Sachs. Give them some cash, take some stock. This is along the lines of what Sweden did to prop up its banks during a banking and real estate crisis in the early 1990's.

The reason why many economists are coming out in favor of a stock injection plan is that it is the scenario in which taxpayers are most likely to see a return on their enormous investment. Such a program would essentially treat the U.S. government and taxpayers as investors, which--whether we like or not--we now are. Naturally, the biggest resistance to this plan comes from the banks themselves. (According to NPR, Paulson's initial attempt to buy up bad debt at face value was based more on American squeamishness towards "socialism," than on sound economic policy.)

Treasury officials stated today that the bailout bill "gives them the authority to inject cash directly into banks that request it," taking what could be an initial step in the direction of a direct investment or stock injection plan. Of course, the program will be voluntary--but it's a start. Thanks, George.

At any rate, it's most important that we recognize, as the Economist has, that global governments must work together "not just to stem panic but also to save money. Even if, as the Europeans claim, the crisis was made in America, it now belongs to everyone."

You can read the full text of the bailout bill here.

Then, let us know what you think.