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September 21, 2008


I don't think people are arguing the Bush administration would want it as much as they're arguing it's a good idea. Or at least a better idea than just having the government buy the debt instruments that no one will pay anything for now but maybe someday will fetch real money.

Krugman has a good point.

The banks and investment firms need equity investments. Owning equity is generally a passive activity - it wouldn't involve any Government management or oversight. The bad investments and related debt could stay with the firms and get resolved in an orderly manner.

If financial institutions weren't under capitalized (didn't need additional equity) they wouldn't need to be distressed sellers.

The investment community (stockholders) can act, in many regards, as the best oversight authority. The objectives of the employees, the management and the owners (which would include the Federal Government, to some degree) would be aligned.

A risk of an RTC type authority isn't just that there is no "upside" - it's that the RTC becomes the distressed seller. The role of the distressed seller is transferred from the private sector to the public sector.

Even if the agency can better "wait out the market turmoil" they are hindered by being poorer marketers and evaluators of the assets they will manage.

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