Is it better to take the wrong medicine than to take nothing at all?
When Mrs. Angus and I have to give pills to Mr. Pluto, we wrap them in cream cheese and toss them up in the air. He leaps up and grabs them and down the hatch they go. Our political elites must have been watching as the Hank n' Ben rescue plan, rejected once by the House has now been wrapped in $150 billion of lard and tossed back out for the House to swallow.
As many distinguished economists have pointed out, this plan (eloquently described by John Cochrane as the mother of all bailouts) simply does not address the core problems (lack of capital in some banks and lack of short term lending) in any kind of direct or efficient way. In my view, it aims to address bank capital problems indirectly by bailing out investors.
I think the crisis is real and something will have to be done. I also think in some sense the whole process of this legislation's (non) progress has contributed mightily to the uncertainty and downswing in the markets. Passing the bill might at least remove that source of uncertainty and maybe even raise confidence a bit. It also seems clear that, to Hank n' Ben, this is the only option. None of the other approaches suggested for re-capitalization appear to be on the table.
The above paragraph notwithstanding, I am still against the bill and hope it does not pass. I think the piecemeal approach we've used so far can continue to work for long enough that a more sensible re-capitalization scheme can be implemented. I do understand though Krugman's point that time is running out and maybe we need to do this plan to buy enough time to get a better plan (as bizarre and expensive as that sounds).