It Becomes Even More Obvious Where We're Going

From the NY Times:

WASHINGTON — The United States and Britain appear to be converging on a similar blueprint for stemming the financial chaos sweeping the world, one day before a crucial meeting of leaders begins in Washington that the White House hopes will result in a more coordinated response.

The British and American plans, though far from identical, have two common elements according to officials: injection of government money into banks in return for ownership stakes and guarantees of repayment for various types of loans...

“As this thing has spread, the opportunities for cooperation have risen,” David H. McCormick, the under secretary of the Treasury for international affairs, said. “We need to promote and highlight these common areas.”

With credit markets still frozen and stock markets around the world in a deep swoon, there is a growing consensus that the crisis is now so fast-moving and harmful to the global economy that it demands an unprecedented degree of worldwide coordination.

The Treasury’s openness to direct infusions of cash is a remarkable change in tone from a few weeks ago, when the Treasury secretary, Henry M. Paulson Jr., and the Federal Reserve chairman, Ben S. Bernanke, discouraged such actions in testimony before Congress. “Putting capital in institutions is about failure,” Mr. Paulson declared on Sept. 23. “This is about success.”...

“At a maximum,” she continued, “you can get general principles — the need for a swift recapitalization of the banks, the need for liquidity — so we don’t get an even bigger credit crunch.”...

The direct injections of cash would be for comparatively healthy banks. If a bank is failing and needs to be rescued or shut down, the Federal Deposit Insurance Corporation would handle it through its own procedures.

The Treasury proposal to recapitalize banks stems from the realization that as the stock market keeps tumbling, and as mortgage-related securities on banks’ balance sheets also plummet, it has become harder for banks to raise fresh capital from investors.

The government concluded it would be able to deliver capital faster and with greater assurance if it did so directly....

Another advantage of the recapitalization plan is more subtle: the Treasury would get more bang for the buck. Because banks have debt-to-equity ratios of 10 to one or higher, a dollar spent buying an equity stake would support 10 times as many assets as a dollar spent buying up individual securities.

Administration officials said the government could acquire stakes in the form of common stock, preferred shares paying a specific dividend or some other form of equity. But officials said the government’s offer of additional capital should be made in a uniform way to all banks...

“Only coordinated action by central banks and governments is able to stop the systemic risk and ensure the financing of economies,” Mr. Sarkozy said. He suggested a special meeting of the leaders of the Group of 8 industrialized nations before year-end."

I posted all of these comments because the themes I've being talking about are all there:

Recapitalization
Nationalization
Coordination
Globalization
Total Government Involvement In Crisis

My reason for saying that we should go there has to do with properties of the proposals which I have argued for earlier, but also because it seemed obvious by the reactions of the markets that investors were counting on this scenario, and aren't getting back in until they see it enacted. It doesn't matter what they say in public, look at how they've been behaving.

I understand and agree with Mankiw, Becker, Flynn, etc., that this trend is worrisome, but I see in as inevitable and leading to an easier path to government eventually getting back out.

In any case, it's obvious where this train is heading, and has been for at least a week, if not longer.