13 Oct 2008

Kashkari: Treasury Plan Will Inject Capital Into Healthy Banks

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The storyline is changing so fast, that even expert conspiracy theorists like Robert Wenzel and me are having trouble keeping up with it. Now, ex-Goldman honcho Neel Kashkari (tapped by Paulson to distribute the $700 billion booty) explains that the Treasury plan to recapitalize banks will focus on healthy institutions.

Everyone got that? Remember, the official story is that the feds need a trillion dollars to unclog the credit markets, because everyone is afraid to lend to each other since they don’t know who is holding the Old Maid (i.e. mortgage-backed securities that are based on loans that will default at high rates).

First, Paulson was going to buy up the bad MBS. There were plenty of things wrong with this, such as (a) $700 billion wasn’t enough to make much of a difference, (b) it didn’t address falling house prices, and (c) the whole “Thou shalt not steal” thingie.

Second, the plan changed to injecting capital directly into troubled institutions, in exchange for socialization, er, taxpayer protection. The reason for this was that the first plan failed, even though it has not yet been tried.

Third, the plan changed to injecting capital directly into healthy institutions, because…I have no freaking idea. Even Tyler Cowen, who uses his incredible brain power to generate models of parallel universes in which Paulson isn’t a crook, had this to say about Kashkari’s latest announcement: “[O]f course recapitalization makes the most sense for unhealthy banks. One way to try to figure out what is happening is to work backwards from the lies but that can end up being very misleading.”

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