More information about the feds response to the financial crisis has been released, and Paul Krugman says it’s a bad plan (emphasis added).

Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

Sebastian Mallaby:

With truly extraordinary speed, opinion has swung behind the radical idea that the government should commit hundreds of billions in taxpayer money to purchasing dud loans from banks that aren’t actually insolvent. As recently as a week ago, no public official had even mentioned this option. Now the Treasury, the Fed and congressional leaders are promising its enactment within days. The scheme has gone from invisibility to inevitability in the blink of an eye. This is extremely dangerous.

The plan is being marketed under false pretenses. Supporters have invoked the shining success of the Resolution Trust Corporation as justification and precedent. But the RTC, which was created in 1989 to clean up the wreckage of the savings-and-loan crisis, bears little resemblance to what is being contemplated now. The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust. This difference raises several questions.

You can read the rest of the column for the questions.

As I understand it, the economic pundit guys had thought the feds would come up with a plan by which the taxpayers would get some value back eventually. Plan B pretty much guarantees we won’t. And why do I think the White House is pushing Plan B with all it’s got?

Speaking of which: The White House released a statement on “The Administration’s Unheeded Warnings About the Systemic Risk Posed by the GSEs [government-sponsored enterprises].” The Administration wants us to know that it saw the financial crisis coming. Yes, and we all appreciate the visible, robust and tireless efforts of President Bush to prevent the financial crisis … oh, wait …

I dimly remember that last Wednesday, John McCain blamed the financial crisis on overcompensated executives and their “golden parachutes.” The Dems tried to inject some language about compensation caps into Plan B, and Treasury Secretary Paulson rejected it as a “poison pill.” Let’s see if McCain has anything to say about that.

Some Dems also are trying to get some help for homeowners into Plan B. I’m not holding my breath.

Finally, if anyone wants to reflect on whatever Jeff G. is ranting about here, be my guest. It looks as if his hatred and resentment of all things “progressive” is overriding any concern he might have for, you know, the financial crisis, which somehow must be liberals’ fault.

Update: Sorry, I left out the link to Jeff G.

Matt Yglesias makes an important point that’s not being discussed enough. Of the de-privatization of Fannie, Freddie and AIG, he says,

I’m a little surprised to learn that this is legal without some kind of legislation. It seems pretty far afield from the Fed’s traditional domain. I guess in a storm people don’t care about the niceties. … It seems to me that there this step has uncertain implications far beyond the world of high finance.

I’d like to see commentary on what the feds’ options were regarding AIG. In other words, what kind of ripple effect would we be looking at had it gone under? I honestly don’t know. Certain persons on the right blogosphere are screaming about “bailout-palooza,” and I agree that government takeover of the finance and insurance sectors is, um, way bad. I don’t like it at all. But given the circumstances, what alternatives were there?

Q. And who got us into this mess, anyway?

A. Reaganites and “small-government” conservatives who called for more and more deregulation in the name of “getting government off our backs.”

Nancy Pelosi denied that Democrats had anything to do with the financial crisis. I disagree with that. Plenty of Democrats went along with the deregulation craze without a murmur, and some actively bought into it.

But the mess originated on the Right, and it was the Right that made “regulation” a dirty word. You can argue that some Dems who probably knew better went along with deregulation because they would have lost elections otherwise. But essentially we’re looking at a mob mentality that began on the Right and spread throughout the land in all directions.

Can we, as a nation, learn anything from this? Um, wake me up when it happens. If real-world experience could have taught the “get government off our backs” crowd anything, it would have happened after the saving & loan crisis in the 1980s.

Granted, it probably was written last week, but George Will’s latest column in Newsweek is all about the beautiful natural balance of markets. “[The] point is that markets allow order to emerge without anyone imposing it. The ‘poetry of the possible’ is that things are organized without an organizer.” And there’s a lot of truth in that, especially if you’re talking about consumer goods. The overall experience of centrally planned Communist-style economies is that they are utterly dysfunctional. It is more efficient to allow supply and demand to determine how much bread to bake or how many flashlights to manufacture.

But the Right assumed that if one extreme is bad, the other extreme must be good. They insist that free market theories will somehow fix public schools and the health care crisis, even though competition, supply and demand for these services do not function the same way they function for consumer goods.

The fantasy is that “free markets” will always balance without human intervention, and problems will correct themselves. In a perfect world, that might be true. In this world, the forces of greed, hubris and just plain stupid will outweigh everything if not kept in check.

What we’re seeing now is how “natural balance” really works. Years of moving in one extreme direction — reckless deregulation and privatization — have created a crisis, causing the government to swing to the opposite extreme — nationalization — to correct it

Pursuing a middle way is more likely to keep one from swinging in extreme directions. This is essentially what us barking moonbat loony liberals and crackpot progressives have been saying for years, while the sensible and adult conservatives have been pushing us to extremes.

The other worrisome matter is that the executive branch is acting without even pretending to consult Congress. Like Matt, I question whether this is constitutional. It shows us that the Bush Administration, incompetent as it is, has done a heckofa job dismantling the Constitution and the checks and balances of the federal government.