The U.S. Treasury recently announced that it will inject $125 billion into the country’s nine largest banks; thus, temporarily easing fears of insolvency. Even though this gives the government ownership stakes in banks, directly re-capitalising banks is likely to prove a better tool than buying up “troubled assets,” says the Wall Street Journal.
Moreover, re-capitalising banks is something the government has done before and knows how to do, and giving banks this additional capital cushion should give them some leeway to sell those assets at market prices without risking insolvency. At the same time, it avoids the vexing problem of how to price securities, says the Journal:
However, for free market advocates, these interventions are distasteful. Instead, the goal should be to rebuild the financial system so Americans can once again trust their banks enough that government can recede to its normal supervisory role, says the Journal.
Source: Editorial, Distasteful’ Capital, Wall Street Journal, October 15, 2008.
For text: http://online.wsj.com/article/SB122402721776634391.html
For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17
FMF Policy Bulletin/ 28 October 2008
