October 21, 2008
Paulson's purpose in giving money to the banks is to encourage banks to lend money to others. The problem? The mechanics of the grant. The government is buying preferred stock and warrants with cash and has no management authority. Banks can take the money and do one of four things, all of which are not what Paulsen wants. 1) The banks can hoard the cash. 2) The banks can pay off their debt. 3) The banks can use the money to continue to pay dividends at existing levels. 4) The banks can use the money to buy other banks. Since Paulson has no management control, he cannot stop these other uses of the government's cash, none of which create the economic stimulus he wants (banks lending money).
October 21, 2008 | Permalink
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