Bailouts To Avoid Price Discovery

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The possibility for a government bailout of the banks is gaining momentum. Hank Paulson and most of the Bush Administration continue resist the calls for a bailout but a new administration, whether it is Republican or Democratic, may be more sympathetic. None of the probable major party candidates are particularly animated by a free-market philosophy.
Today's Wall Street Journal carries an article revealing the Myron Scholes supports a form of bailout. He wants the government to consider direct capital injections into the banks. Forget these Federal Reserve deals to lend against risky paper. Why not just hand over cash?
The great fear, apparently, is that banks will reduce lending and sell assets. "But that market solution could destroy value and produce a crippling credit crunch," David Wessel writes. Of course that's nonsense. Selling assets does not "destroy value" it reveals it, by providing a market price for the assets sold. All of the bailout solutions basically amount to attempts to avoid this price discovery.
Brainstorming About 'Bailouts' [Wall Street Journal]

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