This Could Be A Very Big Deal

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October 8, 2008 10:33 p.m.

Laissez-faire taboos and financial benchmarks get knocked down with dizzying speed in recent economic news. But this article just out from the Times seems like a pretty big deal.

As regular readers know, I’ve been closely following the opinions of economists like Paul Krugman, Brad DeLong and others who have been arguing that the concept behind the original Paulson plan is fundamentally flawed — not because of the size itself, or even so much because of who might benefit, but because it does not directly address what they see as the fundamental nature of the crisis. Rather than buying up ‘toxic debts’, they say we should be taking this vast sum of money Congress has just appropriated and injecting the capital directly into the banking system. In more nuts and bolts language, that means the US government buying big stakes in many of our largest financial institutions.

My read of what Krugman was saying a week or more ago was that the bill Congress passed was better than nothing since it was flexible enough to allow either this or the next Treasury Secretary to, in effect, accomplish that recapitalization through the back door.

In any case, if this late Times report is accurate, the folks at the Treasury have come around to the idea of doing it through the front door and soon. As an economist friend just cautioned me, the devil’s very much in the details. But on the face of it at least the Times seems to be saying that the pressure of events, and the failure of everything else they’ve tried to date, is pushing the folks at Treasury to embrace some version of the Swedish model Krugman, DeLong and other have championed.

My lack of economics knowledge makes it the better part of wisdom to leave it at that till other more knowledgeable people weigh in. But we may be seeing a real sea change here.

Late Update: It seems Paulson may have telegraphed that this was where he was heading in a press conference earlier today.

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