This is a great article from Martin Wolf published in the Financial Times. It outlines two contrasting views of what the problem with the financial system is 1) Panic (no liquidity) or 2)Insolvency, and believes that unless the problem is liquidity, then the new TARP will fail the banks. Well worth a read.
Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it
also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It
has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation;
no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a
huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by
imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it.
