Lenin smiles. Hayek frowns.

All that aside, if Paulson were truly motivated by a desire to "use the taxpayers' money more effectively and efficiently," the Treasury would stand aside and let the bad banks enter bankruptcy, then, and only then, buy equity stakes in these institutions.

That would be the surest way to get the bottom dollar price for the taxpayers (assuming one accepts the dubious proposition that we want our government to own large equity stakes in banks in the first place).

There's another way also ... which is to lead the banks to the day before bankruptcy, and then "buy" equity at the barrel of the bankruptcy gun.

That's what Paulson is going to do.

He doesn't need to let these banks go bankrupt and complicate matters by getting pesky lawyers involved.

He can walk them over to the brink and show them the abyss, and let them know in no uncertain terms that they're going to give him an equity stake at whatever price he decides or else he's going to push them over the cliff.

That's how you "get Capone." That's the Chicago way.

I think most economists would agree that buying equity is a better approach then trying to value and purchase CDOs and other securities from banks. Probably, Paulson never could have dreamed three weeks ago that it would be politically palatable for the US Treasury to purchase equity in private banks. I’d count this as a small victory for the economists and rationality.

Agreed. Equity stakes are smarter for this situation. The banks just need $$$ to buy the time to let liquidity return and let the CDO's mature and display their intrinsic value. Giving the government an equity stake sounds "un-American" but it is the best way to properly allocate the risk and rewards for the injection of taxpayer dollars. The market has shown it is unwilling to provide the capital these banks need. The US government is willing to do what needs to be done and current shareholders should rightfully see their stakes in these banks being diluted by the US stake. Hopefully we can recoup this money in the future and the politicians do not try to achieve political goals through the Treasury ownership.

On the topic of international regulatory competition, how has the presence of Japanese banks, some of the most stable of the G-7 banking systems and not in need of help, factored in? Isn't Tokyo the real safe haven prior to the UK guaranty?