The United States should have been in a much stronger position. And when Mr. Paulson announced his plan for a huge bailout, there was a temporary surge of optimism. But it soon became clear that the plan suffered from a fatal lack of intellectual clarity. Mr. Paulson proposed buying $700 billion worth of “troubled assets” — toxic mortgage-related securities — from banks, but he was never able to explain why this would resolve the crisis.
What he should have proposed instead, many economists agree, was direct injection of capital into financial firms: The U.S. government would provide financial institutions with the capital they need to do business, thereby halting the downward spiral, in return for partial ownership. When Congress modified the Paulson plan, it introduced provisions that made such a capital injection possible, but not mandatory. And until two days ago, Mr. Paulson remained resolutely opposed to doing the right thing.
Krugman's position on this has changed a couple of times since the first discussions of the bailout were announced - I think he was pretty firmly in the "we have to do something camp - but he's evolved a bit and now favors an injection of capital into the financial institutions, similar to the approach being taken in the UK.He does, however, think that something needs to be announced before this weekend, or the continued shredding of Wall Street may be unstoppable.
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