Bailout: Dems Have the Smart Solution (Again)

Very quickly here because I have to run out the door, you'll have to google for your own links:

Senate Banking Committee Chairman Chris Dodd has proposed an alternative to Hank Paulson's "just trust me" blank-check bailout proposal.

Simply put:

If Treasury (that means you and me) buys $1 worth of trash assets from a company, Treasury (you and I) gets those assets, plus $1 of equity (stock or senior debt) in that company.

So the companies get the bailout cash they need now, but in return they give us–at no immediate cash cost to themselves–a potential upside down the road. But believe me–because their own shares are being diluted–they're gonna be saying "ouch."

Companies don't have to take the deal, of course. They actually have to request it. If they're on the verge of bankruptcy, the choice is clear:

Take it or leave it.

This solves the fundamental problem with the Paulson plan: either he pays too much for the assets (which bails out the financial institutions), or he pays too little (which is good for the taxpayer, but doesn't solve the problem).

With the Dodd plan, even if we pay too much, we've got that equity to make up for it.

Now: which party is it that understands market discipline?

The economics bloggers–who have been uniformly ravaging the Paulson plan for obvious reasons–are starting to coalesce around the Dodd plan. Watch for more in the course of the day.