The Paulson plan is, he says, better than a poke in the eye with a Lawn Dart(TM), but not much better, because it does little or nothing to recapitalize the banking system:
Tricky bailout politics: The fundamental problem in the financial system is too little capital; bizarrely, the Treasury chose not to address that problem directly, by (say) purchasing preferred shares in financial institutions. Instead, the plan is premised on the belief that toxic mortgage-related waste is underpriced, and that the Treasury can recapitalize banks on the cheap by fixing the markets’ error.
The Dodd-Frank changes make the plan less awful, mainly by creating an equity stake. Essentially, this makes it possible for the plan to do the right thing through the back door: use toxic-waste purchases to acquire equity, and hence inject capital after all. Also, the oversight means that Treasury can be prevented from making the plan a pure gift to financial evildoers. But it’s still not a good plan.
On the other hand, there’s no prospect of enacting an actually good plan any time soon.... If it was the original Paulson plan, no plan is better. Dodd-Frank-Paulson may just cross the line — let’s see what details we have if and when agreement is reached. If the plan looks not-awful enough, I’ll be pro. But I won’t be cheering — I’ll be holding my nose.