Taxpayers must temporarily own a chunk of Wall Street to reset the trust at the heart of free markets.
Like the banker George Bailey in the Hollywood classic "It's a Wonderful Life," the US financial system isn't sick. "No, worse" as George's guardian angel says. "He's discouraged." Indeed, a buy-up of bank shares by the US Treasury is aimed at fixing a "lack of confidence" in credit markets. But where does that confidence really lie?
A bold plan to inject capital into banks will put Uncle Sam inside America's biggest financial institutions. Taxpayers will own a $250 billion chunk of Wall Street while other federal actions will put taxpayers on the hook for potential losses. As lender of last resort, the government will increase the currently low flow of loans to giant hedge funds and small doughnut shops alike.
If it works, the social compact of an economy – shared risk – will be renewed. "Crises often have a way of revealing our better selves," said John McCain. Or as Barack Obama said Monday, this is a moment when people realize the "common stake that we have in each other's success" – just like George Bailey's pleas to the citizens of the fictional Bedford Falls to believe and invest in each other.
We are all "credit swap derivatives" now. (In fact, the word credit comes from the Latin "to believe.")
But restoring trust in a debt-driven economy won't be easy. As with many a government hand in private matters, there's a risk of politics and bureaucratic incompetence also creating doubt and inefficiency. And if this plan fails and the economy doesn't recover for years, tax burdens will rise.