Over the last three weeks or so, a wide spectrum of economists who don't normally agree on policy measures came to a rough consensus: The best, and perhaps only, way to resolve the financial crisis would be a direct injection of capital into financial institutions, in return for ownership stakes. The resulting de facto partial nationalization of the banking system is anathema to free-market conservatives, but when credit markets freeze and the stock market loses roughly a third of its capitalization, laissez-faire ideologues suddenly learn to keep their mouths shut. Thus the news on Wednesday that the U.S. Treasury Department is "considering taking ownership stakes in many United States banks to try to restore confidence in the financial system," as reported by the New York Times. Paul Krugman, who had predicted exactly such a denouement on "The Rachel Maddow Show" on Monday, applauds," and points us to a fascinating analysis by Nouriel Roubini, on how this latest twist came to pass. As first reported by Time's Justin Fox, Paulson hinted in a press conference on Wednesday that the Emergency Economic Stabilization Act of 2008 gave him the authority "to inject capital into financial institutions." Readers may recall that the original Paulson plan included no provision whatsoever for taking equity stakes in financial institutions. It was a bailout, pure and simple, designed to take "toxic" assets off the balance sheets of participat ...
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