Sebastian Mallaby strikes me as a pretty business-friendly, establishment-oriented type so when he says this bailout package stinks I suddenly go from thinking “this smells fishy to me, but maybe these guys know what they’re doing” to “oh shit.” He points to a couple of better models:

Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments. Banks don’t do that on their own because it would signal weakness; if everyone knows the dividend has been canceled because of a government rule, the signaling issue would be removed. Second, the government should tell all healthy banks to issue new equity. Again, banks resist doing this because they don’t want to signal weakness and they don’t want to dilute existing shareholders. A government order could cut through these obstacles.

Meanwhile, Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks’ bad loans but by buying equity stakes in the banks themselves. Whereas it’s horribly complicated to value bad loans, banks have share prices you can look up in seconds, so government could inject capital into banks quickly and at a fair level. The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.

Here’s Zingales on “Why Paulson is Wrong.” Here in Vegas, the house always wins, but I at least have a sound understanding of the underlying mechanism.

Doug Elmendorf, senior fellow in economic studies at the Brookings Institution is not, I take it, a Communist of some sort. But he says that instead of buying financial institutions’ bad assets, we should be buying the institutions:

An alternative to the government buying certain types of debt from financial institutions is for the government to make equity investments in a wide cross-section of such institutions. For concreteness, suppose that the government offered to make an equity investment in every firm regulated by a federal or state banking regulator equal to 10 percent of the market value of the company as of September 1st in exchange for a 10 percent equity stake in the company. (The 10 percent figure is illustrative. As with the first approach, a judgment about the appropriate total amount of government funds would need to be made.)

He goes on to observe that objections can be raised to this. But it has several important advantages over what Paulson is proposing. Most importantly, the government would “own the upside” of the bailout. In other words, if the plan worked and confidence was restored in these institutions, the value of the taxpayers’ investments would go up. If the plan failed the public would lose a ton of money, but obviously with any plan if you fail bad things are going to happen. Under Paulson’s plan, by contrast, the public has very little upside.

The other big advantage is that the equity proposal leaves the government bailing out everyone equally. Under Paulson’s plan, as I understand it, you would be giving more help to financial institutions that had made bigger fuckups.

Now in typical Brooking style, Elmendorf is being calm and judicious about this in his tone. Judicious to a fault I would say. He’s acting like this is just a decision that’s going to be made on the merits, so what’s needed is a calm and judicious tone. But there are big interests at stake here. Buying the assets is much less favorable to the taxpayers but much more favorable to well-connected financiers. That, rather than an argument over the merits, is what seems to be crucially at stake here.

Dean Baker has ideas for some fetters congress might want to put on the bailout package:

The government can set whatever conditions it wants on participating in the reverse auctions. One of the conditions it should set is that executive compensation be severely constrained at any financial firm that participates. For example, it can set an absolute limit of $2 million in total compensation for any executive at any firm that takes parts in the reverse auction.

Since participation in the auction is completely voluntary, this would make the cap voluntary. Furthermore, there need be little fear about losing good talent, because well-managed firms would not have to participate in the reverse auction.

It turns out not to be the case that the Chinese character for “crisis” is formed by combining the characters for “danger” and “opportunity.” Nonetheless, people always repeat that idea because it’s genuinely insightful. This financial crisis is a great opportunity for progressives to gain some leverage over a set of economic problems that it’s normally difficult to devise a workable method of addressing. I’m not holding my breath out for congress to make the most they could out of this opportunity, but for the moment progressives out to be drawing attention to the fact that the opportunity exists.

John McCain’s Contingencies article about health care and already been getting attention for the part where he promises to deregulate health care to make it just like the deregulating banking system. But Brad DeLong wisely notes that there’s actually more laughable stuff than that in the article.

For example, McCain wisely observes that lifestyle habits are a crucial element of public health “The final important principle of reform is to rediscover our sense of personal responsibility to take better care of ourselves and our children.” But then he blames the absence of such information on . . . political correctness:

Parents who don’t impart to their children a sense of personal responsibility for their health, nutrition, and exercise–vital quality-of-life information that political correctness has expelled from our schools–have failed their responsibility.

Pining for the good old days you could call African-Americans “colored” and teachers weren’t afraid to say that Big Macs aren’t very healthy? What kind of nonsense is this? Meanwhile, it would be interesting if McCain actually had a policy proposal to improve public health education in the United States. That sounds like a worthwhile goal, and I’d like to hear politicians’ ideas about doing it. But McCain has no such policy. He just calls for “well-informed American families making practical decisions to address their imperatives for better health and more secure prosperity.” But that’s not what’s happening — what we need are ideas to change things.

The administration is requesting “unfettered authority” to buy whatever with the $700 billion worth of bailout money they’re asking for. And of course that’s what they want. If you were to give me authority to do something, I’d prefer to get the unfettered kind. But you almost certainly wouldn’t give it to me. And you especially wouldn’t give it to me if the problem the authority was meant to resolve had occurred under my watch. If this scale of funds is going to be spent. Here’s Ed Paisley for CAP on what a reasonable package could look like:

Thanks to the leadership of Federal Deposit Insurance Corporation Chair Sheila Bair, Congress has a model to work with. The FDIC is doing just this at failed California-based IndyMac Bank. By engaging in systematic loan restructuring, rather than foreclosing on the failed bank’s mortgages, the FDIC will likely end up preserving more value and reducing taxpayer exposure. Whatever agency Congress assigns to this broader task should do the same, restructuring troubled loans in the portfolio of mortgages they purchase in a systematic manner, rather than through piecemeal modifications. The result of refinancing more loans than private holders have been able or willing to do will be fewer defaults and foreclosures.

The financial markets are but one of the economic problems we face. The last eight years brought stagnant wages and weak job creation—with the situation getting even worse over the course of this year. Restoring our economy requires a plan to address the financial crisis and the underlying weakness in our economy. We need to make job-creating, growth-producing investments in our infrastructure and transform to a low-carbon economy. The legislative package that moves rapidly through Congress to implement Paulson’s new plan should also include expanded unemployment benefits and heating assistance for low-income families, increased food stamps, and assistance for states in providing health coverage to families in need during these difficult times. The folly of Wall Street and the negligence of the Bush administration has produced today’s pain on main street. It would not be right if the rescue only rescues firms and not families.

To give the regulatory authorities who failed to prevent this crisis carte blanche to hand out money to the financial institutions who caused the crisis while doing nothing for ordinary people would be outrageous.