This message comes from a savvy reader/investor/economist, and is refreshingly succinct:
At this stage, I think the bailout complicates matters enormously, because the immediate problem is
1) Preventing further runs on banks and money market funds by extending deposit insurance & mmmf insurance
2) Reviving the interbank market by placing the Fed as counterparty and paying interest on loans
3) Keep working capital loans rolling over until solvency can be assessed and workout recaps can be facilitated.
That’s much more important at this stage.
The biggest problem with this bailout package it that it addresses the wrong problem with unspecified consequences.
It has be sold as protecting the people from the financial meltdown.
If it is posed as first the need to protect transaction deposits, and second to protect lending for current business operations and thus employment, then there are clear solutions that do not require a great deal of congressional for action.
The first problem is resolved by removing the deposits insurance cap and support for money market funds — now done.
The second is to restore interbank lending by introducing now the interest on gross reserves (Bernanke has already requested this) and unifying the discount and Funds rate to have the Fed become guarantor of the market.
To restore short term lending to business, restore real bills lending at the discount window, increase the insurance fund to allow FDIC to agressively resolve troubled insolvent banks, rather than fixing troubled assets
This should prevent the meltdown that Paulson is worried about.
Then the problem of the overall capitalisation of the system can be approached later, hopefully with a Swedish style rescue.
However, Doing Something is clearly taking precedence over Doing Something That Might Actually Work.