Post columnist Steven Pearlstein is complaining that the economists and bloggers who argued for the sort of direct injection of capital into the banks that Paulsen eventually carried through should not complain about the money being used to pay dividends to shareholders, bonuses to executives, or just being squirreled away for takeovers. As one of the economist/bloggers that Pearlstein might have in mind, I'll take a quick stab at a reply. First, I would distinguish between two sets of issues. One is a question of getting a fair return on the public's investment, the second is controlling what banks do with the money. Both are important. On the first point, the taxpayers gave the banks capital at less than half the cost that the private sector charges. We know this because we can compare the terms we gave ( 5 percent interest, warrants issues at 15 cents on the dollar) with the terms that Warren Buffet got from Goldman Sachs (10 percent interest, warrants at $1.00 on the dollar). The difference on the first $150 billion amounted to a subsidy to the banks on the order of $80 billion. I don't know of anyone on the left (or the right) who argued that we should give a gift of $80 billion dollars to the banks. As far as the control issue, since the government was doing the banks a very big favor (keeping them in business) we certainly have a right to say that they should not pay dividends (and thereby build up capital more quickly) or write big paychecks to incompetent executives (they are incompetent, competent executives don't put their banks into bankruptcy). I certainly would not have forced the banks to accept the money, as Paulson did. He should have asked the banks whether they wanted to take the deal or not. For the banks that said no, he could hold a press conference immediately after the meeting (the bank CEOs could attend or not, as they chose). At the press conference, Secretary Paulson would announce that J.P. Morgan, Wells Fargo, and the others had refused government money and want to make a go of it on their own. He can then explain that this means that these banks will not benefit from the special insurance extended by the government to interbank loans and under no circumstances would their creditors receive a penny of government assistance apart from that committed by the FDIC insurance rules. He would also point out that short sellers are free to place bets on the success of these banks. That would have been the economist/blogger solution.
--Dean Baker
