I Don't Know What to Think Anymore . . .

. . . from the Daily Kos:

Maybe so. That’s the safest route.
But the defeat offers the Democrats a chance to rethink this whole shebang, to look at some of the ideas from people who got ignored the first time around. This is something I urged last week to no avail.

One of those so far unlistened to is economist Brad DeLong. Although he reluctantly supported the bailout version we saw go down today, as did Paul Krugman, he’s all along thought the 1992 Swedish plan makes more sense, as does Krugman.
Here’s what he had to say on the subject today:

Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem.
It might work like this. Congress:
• grants the Federal Reserve Board the power to take any financial firm whatsoever with liabilities and capital of more than $25 billion that is not well capitalized into conservatorship
• requires the Federal Reserve Board to liquidate any financial firm in its conservatorship when it judges that the firm is insolvent paying off in full or not paying off in full the liabilities of the firm at its discretion, unless
• the Federal Reserve Board finds that preservation as a going concern is in the interest of the taxpayer, in which case Congress
• grants the Federal Reserve Board the power to transform equity stakes in the firm into junior preferred stock at par value and then transfer ownership and custody of the firm to the Treasury
• requires the Federal Reserve to terminate conservatorship if the firm becomes well-capitalized once again.

Someone else who should get some face time among the Democrats is economist Nouriel Roubini.
On Sunday, he explained that any systemic banking crisis requires recapitalization to avoid a massive contraction in credit. "But, purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system." He points out that a recent study by the International Monetary Fund of 42 banking crises found that in only seven instances did the governments in question buy the toxic assets.

In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. ...
Thus the claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification. This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer - the common and preferred shareholders and even unsecured creditors of the banks.

He calls the now-defeated bailout "socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners."
Roubini has proposed HOME (Home Owners’ Mortgage Enterprise): A 10 Step Plan to Resolve the Financial Crisis. There are other ideas, too, like those of James K. Galbraith, Dean Baker and Doug Henwood, who said months before we were brought to this impasse:
The public should get something in return: that means different kinds of financial institutions emerging from this crisis: community, nonprofit organizations – cooperative institutions that would provide basic financial services at low fees to lower and middle-income people, and stay out of speculative markets. This would create a much less speculative and profit-driven financial sector.

It would be interesting to see what effect that would have in competition with the big banks. These new institutions could conceivably offer basic financial services at lower cost than the big guys do. People are paying fees through the nose for basic financial services now. If there were some competition coming from public or cooperative institutions, that would be an interesting use of market competition to promote the public welfare.
Henwood, of course, is talking the long term. But there is no reason an alternative plan for solvency can’t at least lay one or two blocks of a foundation for future reforms.