The Key Issue of the Bailout

As an academic, I think Paul Krugman was a great economist and is a fairly irresponsible commentator. But he gets this one right.

[A]ny bank that wants to remove toxic assets from its balance sheet can do it at a stroke — just declare them worthless, and poof! they’re gone. But of course, that would reduce confidence and capital, not increase it — and that’s not what Hank and Ben are talking about. They’re talking about turning the assets over to Uncle Sam, and getting cold hard cash in return. And then the question is how much cash they get in return. It’s all about the price.
Now, if the price Treasury pays is very low — anything comparable to what financial
institutions are able to sell the stuff for now — it’s going to do nothing for confidence and capital. If the price is high, confidence and capital will improve — but taxpayers may well take a big loss. The premise of the Paulson plan– though never stated bluntly — is that these assets are hugely underpriced, so that Uncle Sam can buy them at prices that help the financial industry a lot, without big losses for taxpayers. Are you prepared to bet $700 billion on that premise?
But how can we help the financial situation without making that bet? By taking an equity stake. That way, if it turns out that the feds are pumping money in at above-fair prices, at least they get ownership, just as a private white knight would have.
There is no, repeat no justification for refusing to grant equity warrants that provide some taxpayer protection. This is, for me, an absolute deal or no-deal point.