Does not compute

The amount of drivel poured forth on the credit crisis is astonishing. It is obviously extremely difficult for academic economists to see what is really happening -- their ability to perceive truth is clouded by their training and priors. My alma mater's Greg Mankiw is a case in point: he's a scholar, a gentleman, and a smart guy, but still comes up with craziness like this:

It could work as follows. Whenever any financial institution attracts new private capital in an arms-length transaction, it can access an equal amount of public capital. The taxpayer would get the same terms as the private investor. The only difference is that government’s shares would be nonvoting until the government sold the shares at a later date.

This plan would solve the three problems. The private sector rather than the government would weed out the zombie firms. The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control.

His plan has good features, but parse that last idea again: since the Government would take non voting shares, the private sector would maintain control.

With all due respect: what planet is he living on? When the Government had *no* equity stake in the banks, Paulson was able to make them sign on to his plan. The Treasury does not need any stinkin' voting rights. The Treasury already has all the rights it needs. Arguments that the Government cannot influence how banks lend is similarly rubbish. All the have to do is nationalize, and then direct, like they have with Fannie and Freddie. At this point, they don't even have to nationalize.

Alan Blinder and Glenn Hubbard similarly claw around in the dark.

Yesterday, the Treasury and the Federal Deposit Insurance Corporation (FDIC) announced the second broadening of deposit insurance coverage within two weeks -- this time, to unlimited deposit insurance for business checking accounts. Some want to go even further.

Hang on a minute. We think it is time to remember that unlimited insurance coverage for all deposits is not costless. It would not address the main problems now undermining confidence in the financial system. It might not encourage bank lending. In fact, it might even have the perverse effects of undermining confidence in the soundness of the FDIC, increasing moral hazard, and destabilizing the financial system.

It was a bad idea two weeks ago, and now there is an international dimension. Policy makers in Ireland, Germany and elsewhere have given a 100% guarantee to bank deposits in their countries. A few countries have gone even further, insuring nondeposit liabilities as well.

Yes, we want to reassure depositors -- and we have. But we need to look before we leap. A country can get in trouble by guaranteeing more than it can afford. Iceland may be in that situation already. Since FDIC insurance has been the rock of stability up to now, the U.S. government should never do anything that calls into question the viability of the FDIC. Just yesterday, it was asked to do more than it has ever done before.

All of the banking system "maturity transforms" (ie. uses short term deposits to make long term loans). Therefore, all of the banking system is subject to bank runs. Only part of the banking system, though, is covered by FDIC insurance. The rest of the banking system, is experiencing one enormous bank run. The US Government is retroactively, and in fits and starts, extending FDIC insurance to this exposed part of the banking system, which is good, because an MT system must have FDIC insurance in the same way a fission reactor must have control rods. The fact that these did not already exist demonstrates the complete ineptitude and incompetence of the macro and finance branches of economics. The awful scenario that Blinder and Hubbard describe is reality as it has existed for about 350 years.