Is Socialism the Solution?

The following is my attempt to summarize what I understand from reading economists' commentary on the financial crisis and possible remedies for it. See Delong. And Mankiw has links to most of the public comments by major economists.

Across the spectrum of responsible economists, it seems that there is concern about the solvency of banks (revealed in the increase in the TED spread) and the functioing of credit markets.

And it seems that the way to deal with it is to use the US Government's great ease of borrowing money to improve the equity of the financial institutions. The problem with the Paulson plan is that it seems to do that the wrong way: it creates a fake, subsidised market for mortgage-backed securities which thereby inflates the value of those assets above what they are really worth.

The Swedish response to their financial crisis. First, make sure the balance sheets are telling the full story. Get the bad news. Don't cover it up. Second, inject public money to make the better institutions solvent by buying equity. Merge, close down, do what you must to shrink leverage while keeping confidence in the system. Finally, sell the publicly owned equity at a profit.

The risk is that the American political system won't work as well as the Swedish one, and public ownership will just mean that decisions get politicized. But that's an even bigger problem with Paulson-Dodd: the value of the assets the government is buying up ultimately depends on the willingness to foreclose on somebody. What government is going to do that?