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BUYING WALL STREET….Over at the Wall Street Journal editorial page, zillionaire hedge fund guru John Paulson outlines what he thinks is a better alternative for stabilizing markets than the current bailout plan. Paulson, of course, is famous for betting a couple of years ago that the mortgage market was going to collapse and becoming rich from his foresight, so that makes him worth listening to.

And unlike, say, the blatherings of the House Republican Study Committee, his plan isn’t self-evidently idiotic. Basically, instead of having the Treasury buy up toxic mortgage securities, he thinks they should directly recapitalize the financial system by purchasing senior preferred stock in failing banks:

The financial market is stabilized, companies get recapitalized, failures are avoided, debt securities are supported, and time is gained for illiquid assets to mature.

The institutions continue to function, their cost of funding will decline as equity capital increases, and innocent third parties like bank depositors, broker/dealer clients and insurance-policy holders are all protected. The only difference is that potential losses are kept with the shareholders where they belong.

Paulson thinks his plan is superior to the current proposal on several counts — and although I’m not sure he’s right about that, that’s not what gets me. What gets me is that the Wall Street Journal editorial page is now running pieces that essentially suggest nationalizing failed banks — which is exactly what this plan would do if the required capital infusions are large enough (which they probably would be, since it doesn’t take much capital to buy a majority stake in a failing bank). Conversely, I, the liberal, am really queasy with this notion. I’m all in favor of better regulation, but the federal government already owns one of the biggest insurance companies in the world, and I’m not thrilled at the idea of them acquiring any more of Wall Street.

We’re in looking glass territory here. Am I too queasy about taking over banks? (That’s a serious question. Am I?) Is the Journal too sanguine about it? What’s going on?

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