Alea

I find the last paragraph a bit glib:-

“What about the taxpayers? The best that can happen to all of us is that the financial crisis ends as soon as possible. This is the first priority, the rest can wait. If the transfer to the financial institutions ends up being too large for society’s taste, then it is always possible for the government to undo some of it through ex-post taxation of excessive earnings. Conversely, if the transfer is too low (the price of the insurance and the first-loss threshold too high), it may well be that we do not get another chance, at great cost not only to financial institutions but also to taxpayers.”

Given that he is proposing sticking it to the taxpayer. I am also of the view that the very fact that these entities remain quoted is a cause of instability in and of itself.

Obama could have the political + rhetorical skills to sell the country on the Ricardo Caballero plan. Because it looks like more “bailout” for Wall Street the opposition will be ferocious.

If Obama could sell Caballero + Luigi Zingales’ “Plan B” + Zingales’ capital gains tax cut –>> a way out of this mess. E.g., Obama could turn this around by selling real change

How should the insurance price discovery work?

the part about operating without capital, a sovereign state with a good credit doesn’t need to put capital, a guarantee on the assets should be good enough, of course this is a temporary not a long term fix.

as for the insurance price, there is no need for one, the state can just take the excess spread over funding for now, when things improve banks could raise capital again and then keep the credit spread for themselves as reserves rather than “profits” and the guarantee would cease.
nb: just speculating aloud here.

acc:
thx, your post is very interesting.
“In my {acc} opinion all policy makers need to understand one thing: The complete collapse of Western financial infrastructure, including the credit of American and European governments is possible.”
I agree, but I think so far have done too little, toolate and have worsened the crisis at every step, this is why it is important to act on a guarantee while governments still have some credibility, that won’t last. Some countries like Ireland or Britain have already little left.