Now we can read the Dodd plan, it’s clear that the equity stake taken in the banks is contingent. The shares only vest if the Garbage Pail agency makes a loss, so the measure is essentially punitive (and quite right too). This fits the Brad deLong diagnosis, but it’s not a capital injection, as the competing Krugman diagnosis requires.
This can be fixed quite easily. When a bank sells a bucket of sludge to the GPA, the GW Bush Memorial Fund buys new shares in the bank equal to 25% of the transaction price; and the bank gives the Fund a second tranche of new contingent shares equal to 100% of the transaction price.
(Updates this post.)
