What now? The first effort must be to find a plan that Congress can pass. It is quite possible to find one that protects the taxpayers’ interest better, by insisting on full reimbursement, after assisted companies return to health. Buying preference shares, as Warren Buffett did in Goldman Sachs, would be a good way to do this.
Second, it seems likely that a number of significant financial institutions will find it hard to fund themselves in coming days, as their share prices weaken and interbank lending is frozen. Central banks must make every imaginable effort – and a few unimaginable ones – to make sure liquidity needs are fully met during this period. The Federal Reserve may find itself having to rescue additional institutions. So, alas, be it.
Third, Europeans (among whom I include the British) must recognise they are in the same boat. In times of such peril, even a small cut in interest rates by the European Central Bank and the Bank of England would send a helpful signal. It is now most unlikely to prove inflationary.
Appraisal: Much as I admire Martin Wolf, I confess I am a little lost right now. Seems to me his position is that Martin is saying the Paulson is wrong because what we have is a problem in liquidity--and Paulson, even as revised, does little or nothing for liquidity.
Okay so far. But if this is the case, why does he favor Paulson as the best bad alternative. Specifically, now that the Fed started pumping money into the system, are we any closer to solving the liquidity problem? And if so, do we need Paulson at all?