Keeping Your Head
I will blog more about the economic crisis later, but for the moment I want to agree wholeheartedly with Clive Crook on why Obama's style has been more appropriate to the situation than McCain's:
I do think Obama is handling the crisis much better than McCain--not because he is suggesting better remedies (he continues to say little), but because his instinct to reflect before opening his mouth and his impeccable taste in [economic, I assume--vp] advisers are both working to his advantage.
I don't plan to vote in the presidential race, barring a last-minute lurch to Bob Barr, but if you held a gun to my head and made me pick one of the two major party contenders this week I'd have to go with Obama. He scares me, but not as much as McCain.
I have a different idea to throw out. If the urgency of an intervention supposedly stems from contagion to the commercial paper market, and the government is now going to play hedge fund anyway, why don't we dedicate the $700 billion facility to guaranteeing the commercial paper of high-quality borrowers for the next six months or so. We could even charge the borrowers a couple of basis points for the service. I'll bet that the taxpayer is a lot less likely to have to pay out much of that $700 billion with this strategy, and then we can use the appropriate tough tactics to flush out any insolvencies in the MBS and CDO markets at our leisure....
I get that Bernanke and Paulson are scared, but what are they scared of? Presumably, a shutdown of short-term commercial lending that would destroy non-financial firms' working capital and lead to a huge downward spiraling contraction as everybody hoards cash at the same time. It seems to me that dealing with the "root causes" is more indirect and less likely to solve the CP problem than propping up the CP market to lower spreads. In addition, the B&P plan has all the obvious drawbacks that everyone else has already identified, e.g. prolonging the recognition of insolvency, delaying the correction of real-estate prices, creating moral hazard, and so on.
There's an old story about operations research, perhaps apocryphal, that occurs during WWII. It seems a flight of our B17 Flying Fortresses had a very tough mission over Germany and many were shot down. An operations research team and a group of generals convened to come up with ways to reduce casualties on future missions. The generals displayed pictures of the shot-up survivors, many with gaping holes, and suggested increasing the armor at those points. The OR guys said "Wait a minute, these are the survivors--we should armor up the places where there AREN'T ANY HOLES."
My suggestion is in this spirit.