Entries for March 21, 2008

The phrase "through a mirror darkly" keeps popping to mind as I think about where the housing/credit crisis and the government's response to it are taking us. We are entering uncharted territory. What seemed unthinkable a few months ago is not only possible today but maybe even probable.

The Fed's brokering and backing of the JPMorgan-Bear Stearns deal may be just the start. Think about it: Uncle Sam might well be on the verge of doing one or more of the following: 1) refinancing a couple million mortgages and requiring lenders to write down the value of loans; 2) buying—via the Fed—billions in mortgage-backed securities; 3) creating a new government entity to nationalize troubled institutions.

If our banks are running short of ready money, maybe we should just call the Organization of Petroleum Exporting Countries. In yesterday's Financial Times, business Prof. Anil Kashyap of the University of Chicago and economic Prof. Hyun Song Shin of Princeton University propose sending Condoleezza Rice to the Middle East to broker a deal where the region's sovereign wealth funds recapitalize our banking system. The pair of profs do acknowledge the sensitive political realities of such a move:

Finally, in case our proposal sounds unpalatable, it should be compared with the alternative in which the banking system deteriorates to the point where a public recapitalization becomes inevitable.