The question for the moment is, How can we get capital back into the financial system? Ideally, it would be great if more Warren Buffetts would step up to the plate and recapitalize financial firms with private money. Unfortunately, that might not happen fast enough to prevent a major economic downturn.
Some economists have suggested that the government inject capital itself. That raises several questions. First, which firms? The government does not want to put taxpayer money into ?zombie? firms that are in fact deeply insolvent but have not yet recognized it. Second, at what price should the government buy in? Third, isn?t this, kind of, like socialism? That is, do we really want the government to start playing a large, continuing role running Wall Street and allocating capital resources? I certainly don?t.
Here is an idea that might deal with these problems: The government can stand ready to be a silent partner to future Warren Buffetts.
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 [and, secondly] set the price. And the private sector rather than the government would exercise corporate control.
An undercapitalized financial firm [will] take advantage of this offer. Because it would need to raise only half as much capital from private sources.
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