The Bar Fight on the Titanic

Steve Waldman asked on Saturday:

Why did Ben Bernanke, widely respected among economists as both a scholar and gentleman, support a rescue plan that very few of his colleagues considered "first-best" or even "second-best"? While there was no firm consensus among economists about precisely what ought to have been done, a plan based on no-strings-attached purchases of difficult-to-value assets by taxpayers was particularly surprising...
Here's a possibility: ... In order to pursue the policy [the Fed's] technocrats thought best, it required large-scale funding from the US Treasury. Dr. Bernanke had to negotiate with Secretary Paulson, whose nickname "The Hammer" is not a tribute to his love of carpentry.

And the NYT seems to confirm Steve's suspicions on Sunday.

People familiar with the early planning efforts for a systemic bailout said the chairman of the Federal Reserve, Ben S. Bernanke, argued that it would be easier and more efficient to inject capital directly into banks. But Treasury officials balked, in part because they were ideologically opposed to direct government involvement in business.

Brad DeLong talks about "the Fed, the Treasury, and major U.S. financial institutions having a bar fight on the Titanic" -- and the differences between the three are becoming clearer. The Fed seems to be in the Gordon Brown camp; the banks are happy to take federal capital injections but don't want any kind of restraints on pay and don't want existing shareholders to be wiped out. And Treasury? Well, at this point it's unclear what exactly Treasury intends to do, although consensus seems to be moving towards the idea of using the TARP to recapitalize the banks, while outsourcing to Frannie the original TARP function of buying distressed assets.

The good news, then, is that the three parties here (never mind Congress, it's had its say, and will have very little further input in the immediate future) are moving to more or less the same place. The bad news is that getting here took far too long, and the parties are moving too slowly, and now it might be too late: the stock market is open on Monday, even if bond markets aren't, and Morgan Stanley, for one, is in the crosshairs. Paulson's like Tommy Lee Jones driving in to the motel in No Country For Old Men: even if he was able to prevent a bloodbath, which is far from obvious, it's too late anyway.

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