Now that all the big investment firms are no more, why exactly do we need a bailout? Paulson’s plan involves buying assets that are illiquid, but not worthless. “But regular banks hold assets like that all the time,” writes James Galbraith in the Washington Post. “They’re called ‘loans.’” Runs on non-investment banks only occur when investors panic. Eliminate the arbitrary $100,000 cap on FDIC insurance, and there will be no reason to panic.
The government could toss, say, $500 billion into the FDIC as a “cosmetic gesture” Galbraith says, leaving $200 billion for strategic preferred stock buys, like the one Warren Buffett just completed with Goldman Sachs. Leave hedge funds alone: “You can’t save everyone, and those investors aren’t poor.” This plan wouldn’t revive the economy overnight, but it would do what a bailout wouldn’t: eliminate the systematic financial threat.