It's been a bit since we talked economics, but Steven Pearlstein makes the argument against recapitalization and in favor of buying toxic securities:
Now, many of the same people are shocked -- shocked! -- to discover that the banks aren't using the money to make new loans to households and businesses, as they had assumed, but are using it to maintain dividend payments to shareholders, pay this year's bonuses to executives and traders, or squirrel it away for future acquisitions.
I hate to say it, but I told you so. Sprinkling money around a highly fragmented banking system when markets were panicked and everyone was scrambling to reduce leverage was always akin to shoveling sand against the tide.
I'm not convinced that buying the toxic assets would have been any more effective or any cheaper, but it's also clear that recapitalization isn't having quite the effects we hoped it would, as the banks are not injecting their government largess into the economy at large. And while the credit crunch appears to be loosening at least a little, it's not enough yet.
BK suggests we nationalize a bank. I'm sympathetic to the case, but it may be easier to convince Congress to heavily regulate the use of federal money (as Barney Frank is trying) than to convince the Bush administration to actually take over one of the banks; as well, I'm not aware of any failed banks lying around for them to snap up.
UPDATE: Our own Dean Baker rebuts Pearlstein here.
--Tim Fernholz